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VAT switch: tax point rules clarified

5th Oct 2010
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Tony Jackson takes a look at the rules for deciding which VAT rate to apply on invoices issued around the time of the rate increase.

Most people are aware that the standard rate of VAT increases to 20% from 4 January 2011, but not everyone is clear about how the VAT rules work where invoices are raised or payments are received around that date.

It is the ‘tax point’ which is important. The ‘basic’ tax point is when the supply of goods or services actually takes place, but the tax point is brought forward if an invoice is issued or payment is received before this date; or it is later if the invoice is issued within 14 days of the basic tax point.

Therefore, where a supply has its basic tax point before 4 January 2011 but the invoice is raised on or after 4 January 2011 (but within 14 days of the supply), the rate applicable will be 20%.

However in this situation the supplier can choose to apply the VAT rate at the basic tax point, 17.5%. This would be advantageous where the customer cannot recover part or all of the VAT.

Where invoices are raised or payment is received before 4 January 2011 for supplies made on or after that date, VAT can be charged at the lower rate of 17.5%, subject to the anti-forestalling rules discussed below.

If a supply spans 4 January 2011, HMRC will allow the supplier to either charge VAT at the higher rate of 20% if the invoice is raised after 4 January, or if the supplier wishes, they can apportion the charge between the work done before 4 January and work done on or after that date and charge 17.5% and 20% respectively. As long as the apportionment is fair, HMRC will not object to this.

However, beware strict anti-forestalling provisions which impose a supplementary 2.5% VAT charge on the supplier where invoices are issued, or payments are received before 4 January 2011 for supplies made on or after that date and one of the following conditions is met:

  • The taxpayer supplies the goods or services directly or indirectly to a connected person.
  • The taxpayer provides or arranges funding of the customer’s payment.
  • The supplier issues a VAT invoice to the customer that does not have to be paid in full within six months.
  • The payment or VAT invoice is in excess of £100,000 (including other supplies made as part of the same scheme) where this is not commercial practice.

Importantly these rules will not affect the tax payer if the customer can recover VAT in full; this only affects supplies to partly exempt persons or those who are not in business or not wholly in business.

HMRC says these are likely to affect very few businesses but we shall see. It has issued useful guidance on the anti-forestalling legislation and on how the change in rates affects VAT-registered businesses, available on the HMRC website.

Consult's VAT rate change page for further guidance and debate on the 4 January switchover.

About the author
Tony Jackson is director of VAT Services at BTG Tax. He can be contacted on [email protected].


Replies (2)

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By chrisplews
06th Oct 2010 10:48

Credit Notes

Tony, what are the rules for credit notes and refunds?  It can get tricky if a customer pays an amount before a vat change then returns goods after 4th January.

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
08th Oct 2010 13:29

Use same rate as original transaction

In Tony's absence, I referred back to last week's guidance from Abbeytax, which advises (based on HMRC instructions): "Business should apply the same rate as originally declared for refunds or credit notes." (item 4 in the introductory "Rate change basics" box at the top of the page).

For ongoing advice, discussions and debate, keep an eye on's VAT rate change page, which also includes some leftovers from the switchover at the beginning of 2010.

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