On January 4, 2011 the VAT rate will be raised to 20%. Here, the Retail Motor Industry Federation puts forward three scenarios and some general advice on coping with the change.
What is the invoicing process and applicable VAT rate in the following circumstances:
If a vehicle is invoiced in prior to 4 January 2011 and part paid and then delivered in January or beyond:
Under the basic rules, a 17.5% rate of VAT is applied to the part payment paid in before January 4 and 20% applied to the balance paid on/after 4 January 2010.
However, if the pre-January 4 invoice is a VAT invoice the dealer can account for VAT at 17.5% subject to the anti-forestalling legislation. Further information is provided below.
If a vehicle is invoiced and fully paid before January 4 2011 but delivered after January 4 2011:
As the vehicle is fully paid in December, VAT will be applied at 17.5% on the payment. Delivery in January does not change the tax point.
If a vehicle is invoiced on finance prior to January 4 2011, the deposit paid but finance payment not received until after January 4 because delivery is after January 4:
As the deposit is paid in before January 4, the dealer should apply the rate in force at that time, eg. 17.5%. As the balance is being paid after January 4, VAT will apply at 20%.
However, if the invoice was a VAT invoice then this will be at 17.5% subject to the anti-forestalling provisions. NB If you are invoicing finance houses you will need to seek agreement for early invoicing from them and ensure finance agreements are dated prior to January 4.
For service work carried out prior to January 4 17.5% VAT rate should be applied on the invoice even if the VAT invoice is not raised until January.
All work carried out from January 4 should be invoiced at 20%. Where work falls over the two periods, split invoices may be issued for the two periods, if not all work should be invoiced at 20%.
Anti-forestalling legislation was introduced as part of the Finance Act to prevent ‘planning’ around the VAT rate change.
Where it applies, a supplementary charge of 2.5% is made. There are a number of instances when the anti-forestalling legislation will apply but the two main areas that are likely to be relevant here are:
> The supplier raises a VAT invoice before the VAT rate change where payment is not due in full within six months of the invoice date; or
> The payment or VAT invoice issued before January 4 amounts to more than £100,000.
Although, if the supplier can show that prepayment or an advance VAT invoice is normal working practice and would happen with or without a tax rate increase, the supplementary charge would not apply.
For cars under £100,000, dealers can achieve 17.5% VAT if they issue a VAT invoice in December and require payment within six months so that the anti-forestalling charge does not apply.
For cars that are over £100,000 in value it is likely that the anti-forestalling rule will require VAT at 20% to be charged.