Anti-forestalling legislation for return to standard rate

HMRC has introduced legislation designed to prevent businesses evading the VAT increase to be introduced in January. Here's a reminder.

On 1 January 2010 the standard rate of VAT will revert to 17.5%. The anti-evasion legislation will affect you if you receive a payment or issue a VAT invoice before 1 January 2010 for goods and services that you are to provide or receive on or after that date. It also applies if you sell the right to receive goods or services free or at a discounted price - with the same rules on dates.

The conditions

The legislation introduces a supplementary charge to VAT which will apply if your customer cannot recover VAT in full on the supply and:

• you supply the goods or services to a connected person (such as another business controlled by you); or
• you or the connected party finance/s the purchase; or
• you raise the invoice but full payment is not due within six months of the invoice date; or
• the value of the supply is more than £100,000 and it is not normal commercial practice for you to pre-invoice or receive pre-payments of this value for supplies made. This applies to pre-payments received or invoices issued from 31 March 2009.

 The supplementary charge

VAT of 15% will be due on the date of invoice or receipt of payment, but a supplementary charge of 2.5% will be due on 1 January 2010.  You should issue a further VAT invoice within 45 days of the charge becoming due. The charge must also be declared as part of the output VAT in the VAT return covering that date.

Are you affected?

If, as part of your normal business, you pre-invoice or receive pre-payments of more than £100,000, or lease business assets for a period of up to a year, you will not be affected by the legislation. You must, however, demonstrate that you did not enter into such arrangements to avoid the effect of the rate rise.

The legislation does, however, apply to chains of suppliers. The supplementary charge will be due where any supplier in a chain is connected to the customer.

If you need advice on the use of the supplementary charge, or have any other questions regarding the change in the VAT rate, please contact VAT partner Bob Jones on 020 7516 2295 or email rjones@littlejohnllp.com