The Government is inviting comments on draft legislation aimed at preventing organisations unable to recover in full the VAT they incur from entering into schemes or arrangements, to avoid the effect of the standard rate of VAT reverting to 17.5%.
The legislation counters forestalling by introducing a supplementary charge to VAT to apply where an actual tax point occurs before the rate rise but the basic tax point - i.e. the provision of goods or services - is to take place afterwards.
In such cases, VAT of 15% is due on the date of issue of the invoice or receipt of payment but a supplementary charge of 2.5% becomes due on the date that the rate reverts to 17.5%.
This charge can only apply where the customer cannot recover all of the VAT that it incurs and one of the following conditions is met:
- the supplier and the customer are connected with each other;
- the payment is financed by the supplier (or somebody connected to them); or
- the supplier raises a VAT invoice where payment is not due until at least six months from the date of the invoice
Similar provisions prevent the use of the grant of rights or similar options as an avoidance mechanism and cover cases where before the rate rise the customer is sold the right to receive goods and services after the rate rise either free or at a discount.
The charge becomes due on the date that the option is first exercised after the rate rise where:
- the grantor and the customer are connected with each other;
- the payment is financed by the supplier (or somebody connected).
It will also apply to situations where a prepayment or pre-invoice in excess of £100,000 is made before the rate change for goods and services, or for the right to receive goods and services, on or after the date that the standard rate returns to 17.5%.
One area where substantial prepayments can reflect commercial reality is in relation to property leases.
Where a premium is payable the legislation recognises this by setting the basic time of supply as the date that the lease is granted, therefore avoiding the need to apportion premium payments between the lease period occurring before the VAT rate change and that occurring after it.
A further exception is made in relation to the leasing of assets. The legislation provides that, where a prepayment or invoice relates to an asset lease for a period of up to a year and that accords with normal commercial practice, the supplementary charge will not apply.
Comments on the scope of the legislation should be sent by 10 April 2009 by email or post to Jack Fletcher, HMRC, VAT Policy, 3-34, 100 Parliament Street, London SW1A 2BQ.
