Changes to the VAT rules: January 2011
10th January 2011
A What this note is about
The standard UK VAT rate went up from 17.5% to 20% on 4th January 2011. Since this change has received widespread publicity over the last few days and weeks, this note goes into more detail as to its precise workings.
This seems a reasonable time, therefore, to summarise a variety of VAT provisions that have taken or will take effect in January 2011.
B The increase from 17.5% to 20%
Examples of the practical workings of the change
HM Revenue & Customs ("HMRC") has published a detailed guide to the rate change for VAT-registered businesses. This deals with a variety of practical issues.
In particular, if a trader provided goods or performed services before 4 January 2011 and raises a VAT invoice on or after that date, then the trader can choose to account for VAT on the supply at 17.5%. If the trader makes a continuous supply of goods or services, then the trader can account for VAT at the 17.5% rate on the part of the supply made before 4 January 2011. A similar rule applies where a trader makes a single supply over a period that commences before 4 January 2011 but is not completed until after that date. Proper apportionment to the different periods must of course take place. (See also the VAT Act 1994, sections 88 and 89.)
The supplementary 2.5% VAT charge on supplies
Under "anti-forestalling" provisions, a supplementary 2.5% charge to VAT may have arisen on 4 January 2011 or may arise in future. The situations when this applies are, however, limited.
In order for a charge to arise, the supplier must have received a payment or issued a VAT invoice before 4 January 2011 for goods or services to be provided by the supplier on or after that date. The supplementary charge will generally have become due on 4 January 2011, so it will need to be reflected in the supplier's next VAT return. Where the charge relates to a grant of a right to goods or services, it will not become due until the first occasion on or after 4 January 2011 when the right was/is exercised.
As already stated, the circumstances in which the charge may arise are limited. First of all, the supplementary charge does not apply where the person to whom the supply is made can recover all the VAT on the supply as input tax. In addition, in order for a supplementary charge to arise one or more of the following conditions must be satisfied:
- Condition A: The supplier and the customer must have been related at some point between the date of the supply (or the grant of the right) and the date of the VAT change; and/or
- Condition B: The aggregate of the relevant consideration for the supply and for every related supply that spans the date of the VAT change must be more than £100,000. A "related supply" is a supply of goods or services, including a related grant of a right to goods or services. A supply or grant is related to another supply or grant if they are both made as part of the same scheme. A scheme includes any arrangements, transaction or series of transactions. There is an exception from this condition for cases involving normal commercial practice; and/or
- Condition C: A payment received by the supplier before the basic time of supply, or payment for the grant of a right to goods or services, has been be "financed by" the supplier or a person connected with the supplier; and/or
- Condition D: In the case of a supply, full payment of the amount on a VAT invoice must not be due until more than six months after the date of issue of the invoice. There is an exception from this condition for certain cases involving hire purchase, conditional sale or credit sale of goods were and invoices issued in accordance with normal commercial practice. This condition does not apply to the grant of a right to goods or services.
There is a further exception from the charge for supplies consisting of letting, hiring or rental of assets where:
(A) The period to which the VAT invoice or payment relates does not exceed 12 months, and
(B) The VAT invoice is issued or the payment is received in accordance with normal commercial practice.
Comment
One immediate effect of the change in rate is to make the distinction between standard-rated, zero-rated and exempt supplies even more significant than before. For example, all things being equal, adults' clothing (standard-rated) will cost 20% more than children's clothing (zero-rated). Similarly, consultancy services to clients outside the EU are zero-rated, whereas supplies of such services to clients within the EU are subject to VAT.
It has also been suggested that, as VAT rates rise in numerous EU states, the risk of fraud (including "carousel" fraud) increases.
C New rules on the place of supply of cultural, artistic, sporting, scientific, educational or entertainment services
On 1 January 2010 there were substantial changes in the rules as to the place of supply of services for VAT purposes. These rules are important because VAT is due in the place where a supply takes place. The rate of VAT charged is the rate that applies in that place.
As regards certain types of supply, interim arrangements were made, with further changes due to take effect in 2011, 2013 and 2015. From 1 January 2011, therefore, new rules apply to cultural, artistic, sporting, scientific, educational, entertainment or similar services.
From 1 January 2010 the basic rules as to the place of supply of services are as follows:
- For business to business ("B2B") supplies, the supply is made where the customer "belongs".
- For business to consumer ("B2C") supplies, the supply is made where the supplier "belongs".
These rules are modified in relation to services relating to cultural, artistic, sporting, scientific, educational, entertainment or similar activities (including fairs and exhibitions). From 1 January 2011, where these services are supplied to a business, the place of supply is where the customer belongs. This is the general rule for B2B supplies. Where, however, the services are supplied to consumers, the supplies are made where the activity actually takes place. This is different from the general rule on B2C supplies, since the activity might not take place where the supplier belongs. In those circumstances, if the activity takes place within the EU, the supplier might have to account for VAT in the place where the activity takes place. These rules also apply to services that are ancillary to the activities listed at the beginning of this paragraph, including services of organisers of such activities. During 2010 the place of supply of all these services was the place where the services were physically carried out, regardless of whether the customer with a business or a consumer.
Modified rules also apply to B2B supplies of services in respect of admission to cultural, artistic, sporting, scientific, educational, entertainment or similar events (including fairs and exhibitions). From 1 January 2011 these services (including supplies of ancillary services relating to admission to such events) are supplied where the event actually takes place. During 2010 these services were supplied where they were physically carried out, which might not be where the event took place.
HMRC's public Notice on the Place of Supply of Services gives guidance on a variety of situations that may arise in this context. When it comes to understanding the term "ancillary services", it is also worth nothing that the European Directive on which the new provisions are based refers to "ancillary transport activities such as loading, unloading, handling and similar activities".
Comments
The new B2B rules will need to be taken into account, for example, when organising international business conferences (as well as in more exotic contexts).
D Other changes to VAT in January 2011 (in brief)
- A favourable method of input tax recover is no longer possible for land and property assets, or for ships or aircraft. Under the Lennartz mechanism, where such assets were acquired partly for business and partly for private use, it was possible to recover all the VAT incurred as input tax initially, paying output tax on private use over a period of up to ten years. Input tax can now only be claimed on the business proportion of a relevant asset at the time when it is purchased. (From 1 January 2011.)
- Supplies of heat and cooling through a network are now taxed where they are consumed (like gas and electricity)-from 1 January 2011.)
- Zero-rating for aircraft has been restricted. It now applies to aircraft used by an airline operating for reward chiefly on international routes, and to aircraft used by State institutions and meeting certain other conditions. (From 1 January 2011.)
- VAT exemption for postal services has effectively been restricted to public postal services provided by Royal Mail. (From 31 January 2011.)
E Final comments
This whole discussion perhaps shows that the devil in VAT is very much in the detail! The amounts at stake are, however, often substantial.
See also details of our services relating to VAT.