The UK Value Added Tax (VAT) standard rate will increase to 20% on 4 January 2011 from the current rate of 17.5%. This rate change does not affect exempt supplies (e.g. financial services), zero-rated supplies (e.g. food and children’s clothing) and reduced 5% rate supplies (domestic fuel and electricity). But the increase will be unwelcome for those who can’t reclaim VAT on inputs particularly the unregistered small businesses. In simple terms their input costs will go up by 2.5% and there are very limited VAT planning opportunities. The most common approach, a short-term measure, is to advance their purchases as much as the cash flow permits. For those claiming VAT would better agree extended credit terms with suppliers and time their VAT purchase invoices in advance such that supplier credit is available till the input VAT is recovered from HMRC.
However, the Finance Act 2010 has introduced ‘anti-forestalling rules’ which will apply where it is perceived that there is tax avoidance. The rules apply to transactions that span the date of the VAT rate change. That is, where a VAT invoice is issued and/or prepayment received before 4 January 2011 (creating an actual tax point) but the basic tax point, when goods or services are to be provided, is on or after that date.
The rules, however, won’t normally apply where the purchaser of the goods or services can recover the input VAT in full.
