RMI Advice On VAT Rise

The RMI has issued guidance to dealers on the higher rate of VAT that comes into force on 4 January 2011.

The advice covers the possible options open to dealers in the lead up to the introduction of the higher rate tax.  The full advice is available here

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 per cent rate of VAT is applied to the part payment paid in before 4 January 2011 and 20 per cent 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 per cent 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 per cent 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 per cent.  As the balance is being paid after 4 January 2011, VAT will  apply at 20 per cent.

However, if the invoice was a VAT invoice then this will be at 17.5 per cent 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 per cent 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 2011 should be invoiced at 20 per cent.  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 per cent.

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 per cent 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 per cent 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 per cent to be charged.