October 29th, 2012 / Insight posted in

When does the lower VAT rate apply?

BS writes: We placed a large order for equipment on November 19 and we paid a 25% deposit at that time. We expect delivery to be in mid-February and will pay the balance then. The deposit included Vat at 17.5%, as it was paid before the change in Vat rate to 15%. Does the new Vat rate apply to the full value of the order, just the outstanding balance, or none of it?

Special optional rules will apply to the supplier in respect of the deposit paid by you, which is treated as a pre-payment, writes Jon Sutcliffe, partner at Kingston Smith LLP.

As the deposit was received by your supplier before December 1, when the Vat rate changed, he has a choice. He can account for the 25% payment already received at the new or the old rate.

If the supplier has already issued an invoice to you, he will need to issue you a credit note if he is willing to use the optional rules and apply the 15% rate rather than the old rate.

Any payments made or invoices received after December 1 will always be subject to the 15% rate. So if you ask the supplier to apply the new Vat rate to his pre-payment, and he agrees, then the new Vat rate will apply to the full value of the transaction.