VAT: Get ready for the rise
With the increase in the VAT rate from 17.5% to 20% from 4 January 2011, everyone will be keen to ensure that rent and service charge demands are raised at the appropriate time so that the 17.5% rate applies for as long as possible.
The VAT rate to be applied to rent and service charge demands is determined by the tax point for the supply.
It would normally be the case that rent or service charge demands for the quarter commencing 25 December would be issued in mid-December, and should therefore bear VAT at 17.5%. If, however, due to the holiday period, the demands are not issued until after 3 January 2011, the VAT rate will depend upon whether the tenant had paid the amount due before 4 January 2011 (in which case VAT would be at 17.5%) or after (in which case it would be 20%). This is because the VAT date is the earlier of the date of the invoice and the date of payment. Therefore, to avoid the confusion of some tenants being chargeable to VAT at one rate and some at another, managing agents should ensure that March quarter invoices are issued before 4th January.
For those tenants who are able to reclaim any VAT paid on rent or service charges in full as input tax, this will only be a cash flow concern. However, tenants who are not registered for VAT, or who are partially exempt, should ensure that they make payment of their rent and service charge liabilities in respect of the quarter ending 24 March 2011 by 3 January, if they have not received a demand by that date.
So far as managing agents are concerned, who are managing residential properties, or commercial properties, where the “option to tax” has not been exercised, they should ensure that they settle liabilities before 4 January 2011 for service contracts commencing before that date for which they have not been invoiced.
By way of example; if a contractor normally bills a contracted sum of £10,000 monthly in arrears, when an invoice is raised for January 2011 (in early February), VAT of £2,000 would be have to be added by the contractor, making a total charge of £12,000. However, if the payment has been made by the managing agent prior to 4 January 2011, the total due would be only £11,750 – a saving of slightly more than 2%.