Further Education (FE) Colleges are particularly affected by any increase in VAT as many are unable to recover all or most of the VAT that they incur. As it is now known that the standard rate will rise to 20% on 4 January 2011, colleges should now start considering how to mitigate the extra cost that the rate rise will create. 

There are several ways in which colleges can plan now to take advantage of the current standard rate of 17.5%, given that the increase in the VAT rate is imminent. 

For supplies of goods and services, the current rate of VAT (17.5%) will apply if the supply takes place, or the invoice is issued, or payment is received, before the new rate comes into force. 
So the current rate of VAT will apply in the following circumstances:

• Where goods or services are provided before the date of change but will be invoiced after that date, the current rate of VAT should be charged.  
• Any supplies spanning the date of change, which are invoiced after the date of change, can be apportioned so that VAT at the current rate is charged on work performed before the date of change.
• Where goods and services will be provided after the date of change but an invoice is raised (or payment received) before that date, the current rate will apply. However, there are some anti-avoidance measures to be aware of here.

Anti-avoidance measures

If the supplier receives a payment or issues a VAT invoice before 4 January 2011 for goods or services that it will provide to the college on or after that date and charges the college VAT at 17.5%, a supplementary 2.5% VAT charge will become payable on 4 January 2011 if  certain conditions apply. 

Colleges should be aware of the transitional rules relating to changes in the VAT rate as this will enable them to take full advantage now of the current rate, subject to the anti-avoidance measures in place. Where supplies span the VAT rate change date, colleges should ensure that their supplier is aware of the rules regarding apportionment of the supply to ensure that the 17.5% VAT rate is applied to goods and services to the greatest extent possible. 

Capital Expenditure

Colleges that are planning any large scale expenditure should consider bringing the expenditure forward where at all possible. 

Those colleges that have already purchased or constructed buildings and have agreed VAT recovery using the Lennartz mechanism will be required, from next year, to make output VAT payments at 20% over the remainder of the economic life of the building.

However, as a result of recent case law there is a question over whether HMRC are entitled to collect these output VAT payments where there is an existing agreement in place.

For further information please contact your usual Baker Tilly VAT specialist.