Summary and implications
As of 4 January 2011, the standard rate of UK VAT will be increased to 20 per cent. The increase was announced in the Emergency Budget 2010 and came as no surprise. The last UK VAT rise was 20 years ago and the increase is expected to raise £13bn a year in revenue by 2015. The UK currently has the third lowest standard rate of VAT in the EU. However the increase to 20 per cent will drop the UK to joint 12th highest, having a rate above key European competitors such as France and Germany. Although the UK standard rate of VAT will still be marginally below the EU average of 20.36 per cent, this VAT increase could be seen to impact the UK’s tax competitiveness.
- Standard rate of VAT to be increased to 20 per cent: Reduced rated, zero rated and exempt supplies are unaffected by the VAT rate change.
- VAT and SDLT on leases: The knock on effect of the VAT rate change on the calculation of SDLT should be carefully considered.
- Anti avoidance: Anti avoidance measures are in place to operate a 2.5 per cent top up charge where artificial steps are taken to avoid the VAT rate increase.
Who will be affected?
Those that will be directly affected by the increase in VAT are individuals and businesses who cannot fully recover the VAT they incur.
Individual consumers are likely to see the prices of standard rated goods and services increase. Furthermore, VAT exempt sectors, such as financial services, charities and educational bodies will suffer increased irrecoverable VAT on goods and services.
Business to Business Transactions
For business to business transactions, the 20 per cent VAT rate will apply for all invoices issued on or after 4 January 2011. If goods are provided or services are performed prior to 4 January 2011 but a VAT invoice is issued after the 4 January 2011, then VAT can be charged at either 17.5 per cent or 20 per cent (subject to anti-avoidance measures discussed below).
VAT and SDLT on leases
The increase in VAT has a number of SDLT implications for leases:
a) Leases granted after 27 July 2010
In determining the amount of SDLT payable, the net present value (NPV) calculation should take into account the VAT increase on 4 January 2011.
Rent due before 4 January 2011 should include VAT at 17.5 per cent and rents due after 4 January 2011 should include VAT at 20 per cent. As such, if rent is paid on the quarter days, the December Quarter Day will be subject to VAT at 17.5 per cent and the March Quarter Day onwards being subject to VAT at 20 per cent.
Failure to recognise the VAT increase will result in penalties being imposed by HM Revenue & Customs (“HMRC”) as SDLT will have been underpaid for rent on or after 4 January 2011. If VAT has been accounted for incorrectly, an amended SDLT return will need to be submitted along with payment of any outstanding SDLT. Furthermore, interest at 3 per cent will be due on the amount of the underpayment until the date of submission of the amended return.
b) Leases granted after 4 January 2006 but before 27 July 2010 (“Old VAT Lease”)
HMRC has confirmed that a further SDLT return is not required in relation to Old VAT Lease as a result of the VAT increase. Rent will not have been regarded as uncertain due to the VAT increase. This is a welcome decision by HMRC as it would have proved a significant administrative burden for Landlord’s and their advisers to review all Old VAT Leases.
However, where rent payable under an Old VAT Lease is variable or uncertain, and a further SDLT return is already necessary when the rents become ascertained, the new NPV calculation should take into account VAT at the rate of 20 per cent.
The VAT rate change is accompanied by anti-forestalling measures which apply to transactions that are entered into on or after 22 June 2010. Any extra tax will not become due until 4 January 2011. It is not intended for this legislation to catch instances where payment is in accordance with “normal commercial practice “.
This legislation operates by introducing a top up charge of 2.5 per cent where a supply of goods or services spans 4 January 2011, the recipient of the supply cannot recover all the VAT and any of the following applies:
- The supplier and customer are connected;
- The relevant consideration for the supply and any related supply of goods or services amounts to more than £100,000;
- The supplier or a connected person fund the purchase; or
- A VAT invoice is issued where payment is not due for at least six months.
As such, advance invoicing or prepayment will not be effective in “beating the VAT rise”. Careful consideration should be given to any transactions which are above and beyond “normal commercial practice”.