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UK Tax Office Issues Reminder About VAT Changes In January

Robert Lee,, London

16 December 2010

The UK Tax Office has issued a reminder about the two VAT changes that will take place in January 2011. These are the increase in the standard rate of VAT from 17.5% to 20% on January 4, and changes to the place of supply rules for cultural, artistic, sporting, scientific, educational, entertainment or similar activities supplied to relevant business customers on January 1.

The rate change only applies to the standard VAT rate. There are no changes to sales that are zero-rated or reduced-rated for VAT. Similarly, there are no changes to the VAT exemptions. Any sales a company makes at these rates are unaffected by this change.

The VAT rate increase means that there will be consequential changes to the VAT Payment on Account (POA) thresholds. Under the POA, certain businesses are required to make monthly VAT payments. Since the VAT rate change will increase the VAT liabilities of businesses, the POA entry and exit thresholds will go up from GBP1.6m and GBP2m to GBP1.8m and GBP2.3m. The thresholds will change on June 1, 2011 for quarterly reviews and on December 1, 2011 for annual reviews.

For any sales of standard-rated goods or services that a company makes on or after January 4, it must charge VAT at the 20% rate. The special arrangements for businesses trading on December 31, 2009 (when the standard rate reverted to 17.5%) will not apply to this rate change.

If a company has a cash business and calculates its VAT using the VAT fraction it must use the VAT fraction of 1/6 on its standard-rated VAT inclusive sales from January 4. If the business issues VAT invoices, the normal rule is that it must use the new 20% rate for all VAT invoices it issues on or after January 4, which are issued within 14 days (or longer period that has been agreed with HMRC) of the company providing the goods or services.

If a company supplies goods or services before January 4, but issues a VAT invoice on or after that date, it can choose to charge VAT at 17.5%. For continuous supplies of services where a contract started before January 4, a company can choose to charge the old rate, 17.5%, on services actually performed before January 4, and the new rate of 20% on the value of services actually performed on or after.

From January 4, a company may receive VAT invoices with the new 20% rate, as well as VAT invoices with the old 17.5% rate for goods or services it bought before the rate changed. In such cases, it should claim back VAT at the rate shown on the invoice.

The deadlines for submitting VAT returns remain the same, so businesses should continue to submit VAT returns in the usual way – whether they send them monthly, quarterly or annually. For returns that span the change in rate, they will need to add together both the VAT on sales charged at 17.5% and those charged at 20%. The total should then be put in box 1 of the VAT return.

In order to counter arrangements where businesses aim to take advantage of the VAT rate change by applying the 17.5% VAT rate to goods or services to be delivered or performed on or after January 4, anti-forestalling legislation has been introduced.

The other VAT change is that from January 1, as part of the changes to the cross border VAT rules (agreed at EU level in 2009), most business to business (B2B) supplies of cultural, artistic, sporting, scientific, educational, entertainment and similar services will be taxed where the customer is established, under the B2B general place of supply rule. However, supplies of admission to cultural, artistic, sporting, scientific, educational and entertainment events, and services ancillary to admissions (such as cloakrooms) will remain taxable where the event takes place. Business to consumer supplies (B2C) will be unaffected.

Admission will cover any payment that gives the right to attend an event even if it is covered by a season ticket or subscription. This includes payment to attend conferences, exhibitions and seminars even if they are of an educational nature. In-house events will fall within this rule as well as those open to the general public.

TAGS: tax | business | education | legislation

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