Get ready for VAT change

HELEN CAREY, at VAT specialist at Ensors Chartered Accountants, looks ahead to next January’s increase in the rate of Value Added Tax

A number of issues arise from this VAT rate increase which businesses will need to consider.

The Flat Rate Scheme (FRS) sector flat rates to be used from January 4, 2011 have been recalculated to reflect the increase of VAT. Businesses on the FRS will need to ensure that the correct flat rate is applied to turnover from January 4 for VAT periods ending after this date.

The exit thresholds have also been recalculated to reflect the increase. Currently, a business has to leave the scheme if either its tax inclusive annual flat rate turnover exceeds �225,000 or, on a forward look, its tax inclusive turnover in the next 30 days can reasonably be expected to exceed �225,000.

Both of these exit thresholds will be increased to �230,000 on January 4 to maintain the same effect.

Anti-forestalling legislation is included in the Finance Bill which prevents VAT- registered businesses from entering into schemes or arrangements to avoid the effect of the increase.

The measure provides that, in certain circumstances, a supplementary charge of 2.5% of the value of the supply will be due on supplies of goods or services on which VAT of 17.5% has been declared. The legislation targets artificial arrangements and is unlikely to affect suppliers conducting their business as they normally would.

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Partly exempt and unregistered businesses unable to reclaim all VAT incurred, should carefully consider whether it is possible to bring forward expenditure to avoid the VAT rise and subsequent increase in irrecoverable VAT without breaching anti-forestalling legislation.

Businesses with non-VAT registered and partly exempt customers may also wish to invoice early for certain supplies if this is possible without breaching the anti-forestalling legislation.

The partial exemption de minimis limits will not be increased in line with the VAT rate increase.

Partly exempt businesses and not-for-profit organisations may find that they are incurring more irrecoverable VAT because of the VAT rate increase from January 4, 2011, which may take them over the de minimis limits.

Partly exempt businesses and businesses which are currently de minimis as a result of the partial exemption rules should consider the need to review their partial exemption method of calculation.