Constable VAT Consultancy LLP

From the 1 January 2010 the VAT rate will revert back to 17.5%. Care should be taken to ensure that the correct rate of VAT is charged and users of the Flat Rate Scheme should ensure that the correct flat rate is used for VAT returns including sales occurring after 31 December 2009.

Sales of standard-rated goods or services with a ‘tax point’ on or after 1 January VAT should be subject to VAT of 17.5%. If you charge VAT inclusive prices and currently calculate VAT using the VAT fraction of 3/23 you should revert to using the VAT fraction of 7/47. For continuous supplies of services VAT should be accounted for whenever a VAT invoice is issued or payment is received, whichever is the earlier.

Invoices issued or payments received after 1 January will be subject to VAT at 17.5%. Non-registered and partially exempt businesses may be considering accelerating significant expenditure to pre 1 January 2010 to benefit from the lower VAT rate and businesses already registered for VAT may be asked to invoice non-registered customers for any unbilled work prior to 1 January. However, it should be noted that anti-forestalling legislation is in place to prevent abuse of the low rate. This legislation is too complex to consider in detail in this short article; in summary a 2.5% supplementary VAT charge may be made if a customer cannot recover all the VAT charged on a purchase and any of the following conditions are met:· 

• The supplier and customer are connected during the period from the date of the supply to the date the reduced rate ends.  
• The consideration for the supply exceeds £100k.
• A prepayment in respect of the supply is financed by the supplier or someone connected with the supplier. 
• The amount due on the VAT invoice raised is not due until at least six months after the date of the invoice.  

HMRC have issued detailed guidance regarding the rate change, which can be viewed on their website at http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-rise-guidance.pdf

The Upper Tribunal has issued its decision in the lead cases on the issue of the payment of compound interest where VAT is repaid to a taxpayer. HMRC argue that where a taxpayer receives a refund VAT Law only requires the payment of simple interest at the statutory rate; in these cases the taxpayers argued that they should have received compound interest.

The Tribunal ruled that although taxpayers had a right in principle to compound interest as a matter of EU law, UK statute does not oblige HMRC to pay compound interest on VAT repayments to taxpayers. A taxpayer seeking compound interest as commercial restitution would have to make this claim via a civil law claim in the High Court.

It is likely that these cases will be appealed and heard in the Court of Appeal where they may be joined with a case taken by a group of motor dealers seeking compound interest via a civil law claim, which was rejected by the High Court earlier this year on the grounds that the claims were out of time.

On 1 January 2010 important changes will be made to the rules regarding the cross border supply of services.  These are significant changes affecting both suppliers and customers.  Although 1 January may seem some time away, it is essential that all businesses ensure their systems will be able to deal with the new rules from the outset.