As has been widely publicised, the standard rate of VAT will revert to 17.5% with effect from 1 January 2010.
This means that firms should be thinking now about their billing arrangements, particularly in respect of those clients that cannot recover all the VAT they are charged.
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Many firms, such as accountancy practices and solicitors, regularly make continuous supplies of services to their clients. Services fall into this category where the consideration for work carried out is determined or payable periodically or from time to time. For example, where solicitors are concerned, HMRC consider that trustee and retained legal advisory services fall within this category.
For continuous supplies of services, the point at which VAT is due is the earlier of the date of issue of the invoice and the date payment is received. This means that services invoiced after 1 January 2010 (where payment is yet to be received) should bear the new 17.5% rate of VAT. However, it is possible for the firm to elect to continue to apply the 15% VAT rate in the following circumstances:
- Where services were provided pre 1 January 2010 but invoiced after that date
- Where services will be provided post 1 January 2010 but an invoice is raised (or payment received) before that date. However, there are anti-avoidance measures to be aware of here.
If a firm normally issues Requests for Payments (RFP), rather than VAT invoices, it is important to note that the RFP will not create a tax point. So, if an RFP is raised in December for work carried out in 2009, the total fee shown on the RFP should include 15% VAT if the firm wishes to apply the special rules above. When a tax point is created in 2010 by receipt of payment from the client, 15% VAT is due to HMRC. The VAT invoice subsequently raised by the firm should show VAT at 15%, resulting in no shortfall between the amount paid by the client and the VAT due to HMRC.
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Where a supply spans 1 January 2010, and an invoice is raised (or payment received) after that date, VAT at 15% can be charged on work performed pre 1 January 2010. VAT at 17.5% must be charged on work carried out after 1 January 2010.
The firm will need to consider how the value of the work carried out post 1 January can accurately be determined. The decision on whether to apply the new VAT rate will depend on the firm's accounting system capability and the VAT status of its clients. Those that are unable to recover the VAT they are charged will want to be sure they are paying no more VAT than is necessary.
For non-continuous supplies the same opportunities exist to charge 15% VAT on services that have been/will be performed (see ‘Solicitors’ below).
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HMRC consider that most of the supplies made by solicitors are single, non-continuous supplies. This would include ongoing work, such as litigation, and one-off work, such as will preparation.
Under the normal rules, supplies with tax points created by payments received or VAT invoices issued on or after 1 January 2010 will be liable to the 17.5% VAT rate.
However, as above, there are optional rules which would allow firms to apply the 15% VAT rate, as follows:
- Where the service was provided pre 1 January 2010 but invoiced after that date
- Where the service will be provided post 1 January 2010 but an invoice is raised (or payment received) before that date. This would be beneficial for any non-VAT-registered clients or those unable to recover in full the VAT they are charged e.g. non-profit-making organisations, education providers and charities. However, there are anti-avoidance measures to be aware of in this instance.
Where work commenced before 1 January 2010 but will not be completed until after this date, the supply can be apportioned between the two VAT rates.
Note that, as for continuous supplies of services above, the issue of a Request for Payment (rather than a VAT invoice) does not create a tax point.
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If a firm receives Standard Monthly Payments from the Legal Services Commission for legal aid work then the VAT rate applicable will depend upon whether the case is completed or not. Where the case is uncompleted as at 1 January 2010, an SMP received after this point can be apportioned between the two VAT rates. This means that 15% VAT is due on the work performed before 1 January 2010, and VAT at 17.5% is due on the work performed thereafter.
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Firms need to act quickly to ensure that their systems are ready for the rate change. In addition, there will be a number of considerations when deciding whether to elect to apply the 15% rate, where this is an option, both in terms of cash flow and absolute VAT savings for clients.
Baker Tilly can help you manage this process and ensure the optimum result for both you and your clients.