Ellen Main-Jeffrey, Head of VAT Services at Burgis & Bullock, looks at the impact the mooted reduction in VAT rate could have on businesses.
There are widespread rumours that the government is considering cutting the standard rate of VAT to help households cope with the general cost of living crisis.
If true, this would go a lot further than the recent calls for a reduction in the rate of VAT on domestic fuel and power and indeed the reduction in the VAT rate applied to hospitality during the pandemic.
So, the change is likely to be accompanied by strict “anti-forstalling” rules to prevent the manipulation of tax-points in order to take any unfair advantage of the reduction in the rate.
However, regardless of any “anti-forstalling” measures, businesses need to understand how the tax-point rules apply to their particular business supplies in order to apply the reduction in the VAT rate correctly.
The tax-point is the date when the VAT becomes due on the supply and it isn’t always the date the invoice is raised.
For example, for a supply of goods the basic tax point is when they are made available to the customer e.g delivered, which may indeed be the date they are invoiced and paid for.
However, if they are invoiced or paid for before the date they are made available, then the date they are invoiced or payment received becomes the actual tax-point whichever was earlier.
Once they are made available, then the basic tax-point occurs and VAT is due on that date … unless the business raises an invoice within the next 14 days (or other such period agreed with HMRC) creating the actual tax-point overriding the basic tax-point.
Please note that once the goods are made available, payment is irrelevant to determining the tax-point.
As you can see, the rules are very complex and there are different rules for services.
Businesses could easily find they have inadvertently accounted for VAT at the wrong rate if they misunderstand how the change affects them!