Vat rates are returning to 17.5% on 1 January 2010, so if you’re a limited company contractor you will need to amend your invoices and the calculations in your VAT returns.
HMRC has created an in-depth rate-rises guide, plus summary pages on its website, which provide a detailed explanation of what you should do when sending out invoices that straddle the two periods and describe how to account for any purchases.
But if you are a flat-rate VAT scheme contractor, you will have to wait until later in December before finding out what new rates come into force on 1 January 2010, and exactly how you should apply them if your VAT period straddles the change-over.
Changes to client invoices
According to HMRC’s rules, the normal ‘tax point’ rules apply. That means the VAT is due on the date of invoice or the date of payment, whichever come first. For most contractors paid weekly or monthly in arrears, the key date is usually the date of invoice.
So, for example, if you invoice your agency or client for a month’s work on 31 December 2009, the rate of VAT you charge is 15%, even if your agency or client pays you a week later into the period with the new VAT rate, because 15% was the rate in force when you invoiced. Similarly, if you invoice on 2nd January 2010 for the work you completed in December or before, then you’ll charge 17.5% VAT, because the tax point is after the rate change.
If your invoice straddles the deadline, then all the hours/days you bill for up to 31 December 2009 will attract VAT at 15%, and all the hours/days you bill for from 1 January 2010 will attract VAT at 17.5%. You will need to break this down in your invoice to the agency or client accordingly.
In the event that you will be quoting for a fixed-price project in December that will straddle the changeover date, then HMRC recommends charging 17.5% for the entire project if it’s not possible to breakdown the work by time.
Completing VAT returns
Your VAT returns should be completed according to your regular schedule. So if, for example, you file quarterly in the same cycle as the tax year, then you’ll be completing your return for October/November/December 2009 for filing at the end of January 2010. You would use the 15% VAT rate for input and output tax in that quarter. In your next return, covering January/February/March 2010, input and output tax will be charged at 17.5%.
In both cases, you might find you have to make some adjustments if, for example a company phone bill straddled the changeover date and so charged you in advance in December at 17.5%, and similarly you may have adjustments carried forward from December where an item had the 15% rate but appeared in January.
Should your VAT return period straddle 1 January 2010, then you have to do the sums for the input and output tax at 15% before 1 January, and input and output tax at 17.5% on 1 January, then add them together when completing the VAT return.
VAT and negotiating new contracts
During contract negotiations, most contractors quote hourly or daily rates that are ex-VAT. For most businesses in the UK, VAT is paid out to suppliers and comes in from customers, and is therefore not a cost to the business.
This is not the case with some types of organisations that are unable to reclaim VAT, such as charities or certain types of financial services firm, and so VAT can become a real cost issue for these organisations.
As a result, if you find yourself negotiating rates with a potential client that cannot reclaim its VAT, and you are contracting direct with no agency in the chain, then remember to factor in the VAT increase when quoting your hourly or daily rates.
Flat rate schemes
HMRC has indicated that it will revise the rates used for companies using the flat-rate VAT scheme towards the end of the year, but at the time of writing, the new rates had not been announced
HMRC has indicated that it will revise the rates used for companies using the flat-rate VAT scheme towards the end of the year, but at the time of writing, the new rates had not been announced.
However, should your annual flat-rate VAT accounting period follow the calendar year, and the year-end is 31 December, then when the new rate is announced you can simply start the new VAT year with the new rate.
Should your flat rate VAT accounting period straddle 1 January 2010, then you’ll have to do two sets of sums to account for your income and expenditure pre- and post 1 January 2010. Clearly, canny contractors could schedule invoicing and payments to indulge in a little arbitrage and make a bit of extra cash, but HMRC will no doubt think of this too and include an appropriate rule to prevent it!
Umbrella company contractors need not worry about the implications of the VAT changes, as their umbrella company will make any necessary changes. The only exception to this would be in the case of negotiating with a non-VAT registered business, as highlighted above, where it is important to be clear about what your rates will be at the higher rate of VAT.