Ready to face 17.5% VAT?
The temporary reduction in the rate of VAT to 15% ends on 31 December. Is your business ready for the increase to 17.5% that will take effect from 1 January?
For example, if you are a retailer who makes sales that include VAT, then the fraction used to work out the amount of VAT included in a sale will change from 3/23 to 7/47. So if a sale of goods is made for £1,081 including VAT, then the VAT element of the sale is £141 (£1,081 x 3/23) before 1 January and £161 (£1,081 x 7/47) on or after 1 January – a potential tax saving of £20.
VAT savings
There are special rules that could save tax for you or your customers. But do not forget that the rules are only worthwhile if your customers cannot reclaim VAT, for example if you make sales to the general public. If all of your customers can claim back the VAT you charge, or only small amounts of money are involved, then it will be easier just to charge 15% VAT on all of your sales or payments up to 31 December and 17.5% after this date.
Here’s a reminder of a couple of possible tax savings:
Where goods are invoiced or paid for in December or earlier, they will still be subject to 15% VAT, even if they are delivered to a customer on or after 1 January. There is an exception if the value of the goods exceeds £100,000 or the invoice is payable more than six months after it is raised, but these situations are limited.
If you supply services to a customer on a continuous basis, then VAT is normally due according to the rate in force when you raise an invoice or receive money from the customer. However, if an invoice raised or payment received in January or later includes work done before 31 December, then 15% VAT can still be charged on the value of the work carried out up to this date (and 17.5% VAT charged for work carried out on or after 1 January). In effect, there will be opportunities to boost business cash flow and encourage customers to pay in advance for goods or services they will receive in January or later to take advantage of the lower rate of VAT.
New procedures are also being introduced on 1 January 2010 which will be relevant if you pay VAT on business expenses in other EU countries. Please let us know if this could affect your business.