October 29th, 2012 / Insight posted in

Paying early can save on VAT

SS writes: I ordered a new car for my sales manager but the garage has told us that if it is delivered after the present 15% Vat rate is withdrawn, we will have to pay extra. When does the Vat rate change and can we avoid the extra cost by paying for the car early?

Paying early generally advances a tax point and so the Vat should be charged at 15%, writes Mark Bridge, automotive partner at Kingston Smith LLP. The temporary cut in Vat to 15% came into effect on December 1 last year as part of a package of measures to stimulate the economy. The standard rate of Vat reverts to 17.5% on January 1.

 

If you make an early payment, you will be able to benefit from the 15% rate. This obviously makes sense for purchases by unregistered, partially exempt persons, or where the Vat is not recoverable, as on the purchase of a car.

There are anti-avoidance provisions where payment takes place before the change but the goods are delivered after January 1. These give rise to a supplementary Vat charge of 2.5%. The rules will apply where:

  • The parties are connected;
  • The value of the purchase is more than £100,000;
  • A prepayment was financed by the supplier or someone connected with him or her;
  • Payment is not made until at least six months from the date the Vat invoice was issued in cases where the invoice would fix the time of supply.

So you would save £1,000 on a £40,000 car but will have to pay upfront for a car that will not be delivered until next year.