The Retail Motor Industry (RMI) has published guidelines on the change in VAT from 17.5% to 20% in January 4, 2010. The guidelines, while intended for car dealers, may prove useful to fleets who outright purchase their vehicles.
The guidelines say:
On 4 January 2011 the VAT rate will be raised to 20%. Below are 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 4 January 2011 and 20% applied to the balance paid on/after 4 January 2010.
However, if the pre 4 January 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 4 January 2011 but delivered after 4 January 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 4 January 2011, the deposit paid but finance payment not received until after 4 January 2011 because delivery is after 4 January: As the deposit is paid in before 4 January 2011, the dealer should apply the rate in force at that time, e.g. 17.5%. As the balance is being paid after 4 January 2011, 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 4 January 2011.
- Service Invoicing: For service work carried out prior to 4 January 2011 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 4 January 2010 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 04/01/11 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.