October 29th, 2012 / Insight posted in

How to avoid the new 20% VAT rate

DT writes: We have a project in progress with a client. As they cannot recover the VAT on our fees, they have asked us to invoice all of our proposed 2011 fees on 31 December 2010 to avoid the VAT increase. The fees are agreed and will be around £50,000. This feels too good to be true and I would be surprised if saving VAT is that easy, particularly if the fees are not paid early as well. Would HMRC not consider this tax evasion?

The standard rate of VAT will be increasing from 17.5% to 20% on 4 January 2011, writes Adrian Houstoun, VAT partner at Kingston Smith LLP. To prevent VAT savings by those looking to raise invoices before the VAT change, HM Revenue & Customs (HMRC) has some ‘anti-forestalling provisions’ in place for supplies spanning the change.

The provisions apply to invoices where the normal time of supply rules would charge VAT at 17.5% when it would otherwise be 20%, and where customers cannot recover the VAT in full.

There are four provisions that need to be fulfilled in order to charge VAT at 17.5%.

1. The supply should not be to a connected person or organisation.
2. The gross value of the supplies should be less than £100,000.
3. Full payment must be due within six months of the date of the invoice.
4. The customer should not be funded in anyway to enable payment of the invoice

There are special rules for certain types of services, for example, hire of equipment where there is a monthly charge. Here the VAT charge for periods up to the change of rate is at 17.5% and thereafter 20%. Also, most professional firms that have a continuing relationship with their clients, invoice them from time to time, and are able to determine from time-recording systems whether work was performed before or after the change in VAT rate, can charge 17.5% for work performed before 4 January 2011, even though clients may be invoiced after that date.