Contractors' Questions: How to avoid VAT at 20%?

Contractor’s Question: I am working on a project with a client. As they cannot recover the VAT on my fees, they have asked us to invoice all our 2011 fees on December 31, 2010 to avoid the VAT increase. The fees are agreed and will be about £50,000. Would HM Revenue & Customs consider this tax evasion?

Expert’s Answer: The standard rate of VAT will rise from 17.5% to 20% on January 4, 2011. To prevent VAT savings by those looking to raise invoices before the change, HMRC has introduced some “anti-forestalling provisions.”

The provisions apply to invoices where the normal time-of-supply rules would charge VAT at 17.5% when it would otherwise be 20%, and where customers cannot recover the VAT in full.

Four provisions need to be fulfilled to charge VAT at 17.5%.

  • The supply should not be to a connected person or organisation
  • The gross value of the supplies should be less than £100,000
  • Full payment must be due within six months of the invoice’s date
  • The customer should not be funded in any way to enable payment of invoice

There are special rules for certain types of service – for example, hire of equipment where there is a monthly charge. Here the VAT charge for periods up to January 4th is at 17.5% and thereafter 20%. Also, most professional firms that have a continuing relationship with clients, invoice them from time to time, and are able to determine whether work was done before or after the change in VAT rate, can charge 17.5% for work done before January 4th even though clients may be invoiced after that date.

The expert was Adrian Houstoun, VAT partner at Kingston Smith LLP.

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

Monday 22nd Nov 2010