Forthcoming VAT increases, what happens on 1st January?

John_Pierpoint

Is it possible to simplify the rules that will fit onto a post card for existing contracts.

I am talking of a service contract, with usually customers who are not VAT registered, where stage payments are involved,
though there is a final point when one can says the total contracted service has been delivered.

The sort of thing I have in mind is:
Customer pays 25% up front in November.
Most of the work is completed before Christmas so customer is invoiced for another 65% in December.
Any errors & omissions ("snags" if you like) are ironed out in early January.
Invoice is issued for the final 10% in Early January.

The quotation for the work clearly identified the risk that the work could span the year end and this could give rise to extra tax.

The date of payment of the December invoice is up to the customer.

What officially is the trader's liability to the VAT man?

Does the customer's date of payment of the December invoice make any difference.

If the January invoice was issued on 30 December, would that become illegal if the customer found any "snags"?

[I have simplified the situation a bit, in reality invoices are sent out weekly and savvy customers are on the lookout for avoiding the tax increase if they can - I can see arguments in the future]

zygurat789

The answer to your title question is "we all recover from the previous night". There's no need to worry about the VAT increases until Monday 3 January 2011

antrobus

The answer should be at http://www.hmrc.gov.uk/vat/managing/returns-accounts/tax-points.htm. This states that "For transactions where no VAT invoice is issued (for example, sales to customers who aren't registered for VAT) - the time of supply is normally the date the supply physically takes place", which in your case would I imagine be when the "goods ... are made available for the customer to use"; having noted the exceptions relating to the date the payment by the customer.

John_Pierpoint

I don't think I can get that lot onto a post card.

"Excuse me Mr Customer would you like to give me your VAT registration number complete with its check digit validation, so I might believe you?"

I think it will be more like "Here you are mate, I've just spent new year's eve churning out invoices - so best pay them pronto"
If there are any further things you need sorted we will call it a new contract.

It brings back fond memories of a chancellor in the mid 1970's (Healey?) who gave us all 10 days to get our act together before the tax went up - At the time I was responsible for a computer system that churned out thousands of invoices a month on behalf of a dozen profit centres. Great consternation in the accounting department; but I reasoned that the software had been developed in Europe so someone must have had the problem before.
I got a module of computer code sent over from the Continent (remember those 'phones with a dial on the front, where you could place the handset in a cradle and two computers could "talk" to each other - as long as someone did not open the office door in mid conversation?).
Fortunately we ran a 24 hour invoicing policy, so early one morning I was able to run the module and increase the rate of VAT stored in all the open orders, after the clerks had grafted on overtime the previous day.
[There was still one silly department who got the wrong end of the stick (a printing term) and grafted away on overtime cancelling all their open orders and re-inputting them - perhaps they did not trust me].

Happy days,

John.

PS The system used to be outsmarted by GEC (RIP), a company notorious for taking a generation to pay for anything. We used to offer a discount for prompt payment. So you could knock say 2.5% off the value of the goods. As all the customers were VAT registered, nobody much worried about the 8% VAT.
GEC would take 2,50 off a hundred pounds of goods after 3 months, and 20 pence off the VAT and raise two fingers.

GEC were actually correctly accounting for a "cash discount" at that time but by then we had done our VAT return - Does the system still work the same way?

chrismac1

In a nut shell, it is the time the service is provided which counts. Invoice date and payment date are red herrings - unless payment is physically made before the service is provided in which case the payment date is the tax point. So if a customer pays up front they will get the VAT at 17.5%.

In my own case as a practising accountant, any significant work in progress at close of Sunday 3rd will be invoiced to clients as "payments on account" with the 17.5% VAT. All work thereafter is at 20%. Big lump sum service or construction contracts are the trickiest, a QS should really assess the valuation first thing on the 4th and the milestone payment should be invoiced as 2 separate line items, one at each VAT rate.