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Oct

the geese are getting fat: soon we will be paying 20% VAT PUBLISHED IN VAT

If you are reading this blog on or around the day it was first published then you will appreciate that there is approximately two months to go in order to be ready for all aspects of the new 20% rate of VAT. “But”, I hear you cry “it’s more like two months and two weeks”. Well, on a very literal basis that is true, but if you were planning on having Christmas off, or any of your staff are, or your contractors, customers, or indeed your advisors, then everything really has to be done and dusted by around about 20 December to stand any chance of being ready.

 

In what way do we need to be ready? There are two obvious ways, one in being prepared account for the higher rate of VAT on your supplies, and the other, where this is of benefit to you, avoiding having to pay VAT at 20% by judicious purchasing strategies prior to the rate change. In practice, these purchases will probably have to made, rather like the Christmas shopping, prior to Christmas.

This blog will not recount details of the rules for pre-purchasing goods and services, and the anti-forestalling rules which may frustrate that intention. I will not explain the supplementary 2.5% declaration of VAT where suppliers fall foul of the anti-forestalling rules. That would be too complicated and is best covered in advice, or a technical bulletin. Suffice it to say that all partly exempt organisations, such as charities, health, education, financial services, and property (particularly those involved in residential property) need to review these rules very carefully, as do those who sell goods and services to them. 

As a very general rule of thumb, if you wish to obtain goods, then if they are delivered before 4 January they will be subject to 17.5% VAT. The same is true of services where you can say they were definitely delivered prior to the rate change. But, the current rate (prior to 4 January) can also apply where goods and services are to be delivered or completed after 4 January, but subject to the important anti-forestalling rules. Prepayments up to a limit, and usually between third parties rather than related parties can often qualify for the lower rate of VAT on a pre-purchase basis. Pre-invoicing can also work, but subject to rules to limit that practice. When pre-purchasing you have to be sure that you are pre-purchasing something definite rather than something imaginary or unspecific. In general, pre-purchasing ill-defined services such as “consultancy” is likely not to work, whereas pre-purchasing specific computer consultancy, say, in order to fix an operational issue which is clearly identified, probably will.

If you have cash in the bank it may very well be worth spending it to avoid the extra VAT, because the saving is likely to match well against the prevailing rate of interest. But do check the rate of interest you would sacrifice. If you do not have the cash in the bank and you go for a pre-invoicing approach, then your supplier will want to know that he will get paid in the future. He may well demand the VAT element on the nail, and the arrangement only works if you pay him within six months in any case, so you need to be sure that you will not run out of cash to meet your obligations.

Subject to that, there is much that can be done if you can focus on the issues in the next two months. The chance of obtaining a fully cooperative response from a contractor whom you phone on, say, 29 December 2010 for a quick arrangement to avoid the higher rate of VAT is, shall we say, slimmer than the Christmas Turkey. Make sure you are not joining the back of a long queue, either in terms of pre-purchasing or making yourself ready to launch the new rate on time.

“Christmas is coming. The geese are getting fat. All you must think about, now, is VAT”.

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