VAT anti avoidance rules

Finance Act 2009 introduced anti avoidance legislation designed to prevent businesses from manipulating supplies forward to the period when the 15% standard rate applies. When the customers are either VAT blocked businesses or consumers this would give the effect of extending the price reduction conferred by the lower standard rate into 2010, at no cost to the supplier.

The legislation essentially imposes a supplementary charge to VAT in relation to supplies treated as made on or after 25 November 2008 when certain conditions are present. This means that the supplier will be liable to the additional VAT as a result of the increase, even though he has only charged his customer 15%.

The supplementary charge is made if :

• The supply spans 1 January 2010;
• The supply is liable to the standard rate of VAT;
• The supply is made to a person who cannot obtain full credit or repayment of all of the VAT that he bears (this would cover both partially exempt and un registered businesses, and members of the public), and
• A “relevant condition” is met.

The supply is treated as spanning the date of change of rate when :

• By virtue of the operation of the taxpoint rules the date of the supply is before the date of change (through the issue of a tax invoice or receipt of payment), but
• The basic time of supply (normally the date the goods are supplied or the services performed) is after 1 January 2010. There are special rules for the basic time of supply for certain supplies (see below).

This will clearly prevent advance invoicing or payment from creating a VAT saving, but in each case one of the “relevant conditions” must apply for the supplementary charge to apply. Where the taxpoint has been fixed by early issue of the tax invoice, there are four relevant conditions – A to D, and where the taxpoint arises through receipt of payment the conditions are A to C.

Relevant conditions

If any one of these apply then the supplementary charge will be due by the supplier, normally on 1 January 2010. The relevant conditions are :

A. The supplier and recipient of the supply are connected with each other at any time between the day on which the supply is treated as being made and 1 January 2010.
B. The aggregate value of the supply and all related supplies is in excess of £100,000;
C. The prepayment (advance payment – not debtor) for the supply is financed by the supplier or a connected person, and
D. The full payment for the amount on the VAT invoice is not due within 6 months of the date of issue of the invoice.

The supplementary charge does not apply to the letting or hiring of assets provided the advance amount is for no longer than 12 months, and any invoice issued or payment received is in accordance with normal commercial practice. There is also no charge when condition B (connected persons) is met and all other aspects of the supply, including invoicing and payment terms are in accordance with normal commercial practice.

The supplier is liable to the supplementary charge to VAT, which is due on 1 January 2010 rather than at the time of the supply, but in relation to supplies which are a grant of a right to a good or service, the charge is due on the first exercise after 1 January 2010. The amount of the charge is the difference between the VAT charged and the charge at 17.5%. Where the actual supply (the delivery of the goods or the performance of the services) spans 1 January 2010 then the consideration is apportioned on a just and reasonable basis so that only the supplies actually made after 1 January are liable to the supplementary charge.

Schedule 3 also sets down the basic time of supply rules for the purpose of the supplementary charge in relation to what are termed “listed supplies”, rather than using the normal basic taxpoint rules. Listed supplies comprise the following :

• Supplies of services;
• A supply arising from a grant of a major interest in land;
• Supplies of mains water;
• Supplies of coal gas, producer gases and similar and petroleum gases;
• Supplies of power, heat, refrigeration or ventilation;
• Supplies of goods together with services in the course of the construction alteration, demolition, repair or maintenance of a building or civil engineering work.

Generally, the basic time of supply in relation to all of these supplies is the end of the period covered by the invoice or prepayment. If the supply relates to a premium due on the grant of a lease or tenancy the basic time of supply is the date of the grant.

Test yourself

So here’s a quiz to test whether you understand how the conditions apply. Feel free to add your responses below!

Which of the following four transactions will fail the anti-forestalling legislation and be subject to a 2.5% supplementary VAT charge on 1 January 2010?

A – a builder raises an advance invoice to a customer on 31 December 2009 for £100,000 plus 15% VAT in relation to work on his private home. The work will be carried out in May 2010 and paid on 31 May. The customer is not connected to the builder.

B – a firm of accountants raises an advance invoice on 31 December for £150,000 plus 15% VAT to a clothes retailer for work to be carried out in 2010

C – a property owner raises her usual quarterly rental invoice in advance to a bank for a commercial property it rents from her. The invoice is raised on 27 December for £200,000 plus 15% VAT, covering rent up to 27 March 2010

D – a builder raises an invoice for £100 plus £15 VAT to his brother on 31 December 2009 to repair a tap at his home. The work will be carried out in January and paid for at the end of January.