Firms to invoice early as VAT rise looms

Companies are gearing up to use this year’s last working week to mitigate some of the cost of the rise in VAT next month by invoicing in advance.

From midnight on January 4th, the standard rate of VAT will rise to 20% – up from the current rate of 17.5 % - as spelt out in George Osborne’s Budget in July.

Companies whose bills attract VAT are therefore preparing to invoice their clients in advance, as reportedly advised over the weekend by accountants Baker Tilly.

Speaking to the Financial Times, the firm’s tax partner Jim Burberry reminded that “as soon as a VAT invoices is raised, VAT will become payable to HMRC”.

As a result, he said firms should give “serious consideration” to their “cash flow position and, correspondingly, the payment terms offered to that client.”

However advance billing is normally only permitted if the firm is not connected to the client, if the payment timetable is less than six months and if the total is not in excess of £100,000.

Such criteria are imposed by the VAT anti-avoidance measures designed, HMRC says, to prevent the lower rate applying to supplies provided on or after January 4th “subject to certain conditions.”

Still, where they have a continuing relationship with the client, and can tell if the work was done before or after the change, many firms can charge 17.5% for work done prior to January 4th, even though the client may be invoiced after the date.

In its guidance to members, the Forum of Private Business said: “Invoices for work which was genuinely carried out before the date [Jan 4th] can still be processed at 17.5%.

“So most businesses will probably need to create a new standard VAT code at 20%, but retain a code for the old 17.5% rate.”

Chief executive Phil Orford added: “The good news is that HMRC says it will be taking a ‘light touch' in dealing with errors made in the first VAT return after the change if the error relates to the change of rate.

“If you do, however, realise you've made a mistake, you'll need to issue a credit note and then a new invoice at the correct rate to put things right.”

Editor's Note : Further Reading - How will the VAT rise affect me? 

Monday 20th Dec 2010
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