As you’re probably already aware, the VAT rate will rise from 17.5% to 20% on 4 January. Accounting for the rate change will be a fairly simple process for most freelancers and contractors, however, there are special rules which apply to certain grey areas spanning the rate change.
Are you raising an invoice after 4 January but performing a service before the deadline? Or vice-versa: are you providing goods before 4 January and raising the invoicing afterwards? Well, in such situations you get a choice.
When the choice is yours: 17.5% or 20% VAT
When you provide goods or perform a service before 4 January and raise an invoice afterwards, you can choose to raise an invoice for 17.5% instead of 20% – if that is best suited to you and your customer or client.
For example, you’re a freelance writer who has invoiced a client after the rate change for work you did prior to it. Normally, this will be done at 20% VAT, but you can choose to account for it at the old rate.
The same rule applies if you raise an invoice before 4 January for work being performed after that date. Normally, this would be calculated as 17.5%, but you can choose the 20% rate instead.
For instance, I’m a writer who has been paid up front to write a spellbinding article. I’ve been paid before the deadline but won’t be doing the job until afterwards. Here, I call the shots. 17.5% or 20%: the choice is mine.
If you accidentally add 20% VAT when meaning to add 17.5% you can correct this via a credit note which accounts for the extra 2.5% you added; however, this must be done 45 days within the rate change.
Services that span the rate change
In circumstances where your supplying a service across the date of a rate change (i.e. begin a job before 4 January and finish it after that date), special rules apply. There are two situations where this might be the case:
* Continuous supply – for example, where a company leases photocopiers. The contract is open-ended but can be terminated within three months notice. Payment is made monthly in arrears.
* Single supply – for example, where a company prepares a report which spans the change date. It may take four months to complete but amounts to one single product being supplied (not a continuous service).
How to account for a continuous supply
If you’re making a continuous supply of goods, VAT can be charged at 17.5% for those goods or services being supplied before 4 January. For example, as a freelance writer, perhaps I’m drawing up an invoice for my copy services for January. Now, I can choose to calculate those first few days at 17.5% (not that I’d really need to), but on 4 January, I must invoice for my services at the 20% rate.
How to account for a single supply
As a writer, I may need to prepare and compile a report which I begin before the rate change but complete some time after. Usually, you would slap the 20% rate on the whole thing, but if you wish, you can apportion the 17.5% rate to the part of the work you did up to 3 January.
Photo by David Reece – CC
