Standard Rate VAT Increase - 1 January 2010

STANDARD RATE VAT INCREASE - 1 JANUARY 2010

BAR COUNCIL GUIDE

• 1. On 1st December 2008 the standard rate of VAT was reduced from 17.5% to 15%. On 1^st January 2010 it will revert to 17.5%. This guide sets out key points of law which barristers and their clerks will need to be aware of in order to implement the change. This is summarised at paragraph 16 below. It also responds to typical questions which the Bar Council has been asked, in order to show how the change will affect the administration of a barrister's practice. Finally, the impact of the change on computer software, which is used to produce invoices and/or fee notes within chambers, is considered.

• 2. HMRC has issued guidance ("VAT - Reversion of the Standard Rate to 17.5%"). This covers barristers (and advocates) at section 9.2 as follows:

9.2 Barristers and Advocates

If you are a barrister or advocate and you follow the arrangements under which fee notes do not become VAT invoices until they are receipted, then the tax point for your fees is normally the date you receive payment. Fees received on or after 1 January 2010 will be liable to VAT at 17.5%. If you receive fees after 1 January for cases completed before that, date you can declare VAT at 15% .... Similarly, if a fee received after 1 January 2010 includes services partly performed while the 15% VAT rate applied, you can apportion your fees ....

 This guidance is available online at www.hmrc.gov.uk/vat/forms-rates/rates/rate-rise-guidance.pdf .

Background

• 3. Although VAT on services generally becomes due at the earliest of (a) provision of the service (b) payment and (c) issuing of an invoice, there is a special rule for barristers. VAT on supplies made by barristers is chargeable at the earliest of the following times[1]:

• (a) when the fee for the barrister's services is actually received;

• (b) when the barrister issues a VAT invoice;

• (c) the day when the barrister ceases to practice.[2]

• 4. Whichever of these dates applies to any set of circumstances is called the "tax point". It is crucial to note that the actual provision of services by a barrister is irrelevant when determining when a tax point crystallises.

• 5. It is also crucial to note that fee notes need not be, and those generated by standard software packages generally are not, VAT invoices[3]. Issuing a fee note does not, therefore, create a tax point. Usually the tax point is the receipt of the fee (which is followed by the issue of a VAT invoice/receipt).

The change in rate

• 6. The rate of tax on a service is generally the rate in force at the tax point so (subject to the exception below) the VAT change which comes into effect from 1st January 2010 will have the following effects for barristers:

• (a) If the tax point for a particular supply of services arises before 1st January, the standard rate of VAT which must be charged is 15%;

• (b) If the tax point for a particular supply of services arises on or after 1^st January, the standard rate of VAT which must be charged is 17.5%.

• 7. There is, however, a special rule that applies on a change of rate[4]. This applies where a service is provided before the change of rate but, under the special rules above, the tax point falls after the change of rate. The barrister may then elect for VAT to be applied at the original rate. In other words, a barrister who receives a fee on or after 1st January 2010 for work done before that date (but after 1^st December 2008) can choose whether to charge 15% or 17.5%. A barrister paid after 1^st January 2010 for work done before 1^st December 2008 (the date on which VAT decreased to 15%) would have to charge 17.5%.

• 8. In practice, this means as follows:

• (a) Where the fee is received between the 1 December 2008 and 31 December 2009 in respect of work carried out during that period, VAT will be due at 15%.
• (b) Where the fee is received between the 1 December 2008 and 31 December 2009 in respect of work carried out before the 1 December 2008, then VAT can be charged at 15% or at 17.5%.
• (c) Where the fee is received on or after 1st January 2010, VAT will be due at 17.5% unless:
• i) The relevant work was carried out before 1st January (and on or after 1^st December 2008); and
• ii) The barrister so elects.

From the barrister's point of view, there would be a slight cashflow advantage in charging the higher rate.  It will generally be in the client's interests for the barrister to make the election to charge at the lower rate, however, either because the VAT is a real cost (because it is irrecoverable) or at least for cashflow reasons (because the VAT will have been paid out before it can be claimed as input tax). 

Credit notes

• 9. As noted above, if, after 1^st January 2010, a barrister receives payment with VAT at 17.5% for services performed before that date, he can elect to account for VAT at 15%. This will generally be in the client's interests. If the barrister issues the invoice showing VAT at 17.5% for any reason, and later wishes to change that treatment, he can do so by issuing a credit note[5] to cancel the original invoice together with a new invoice showing the correct (i.e. 15%) charge, and refunding the difference to the client. This can only be done before 14 February 2010.

Apportionment of fees

• 10. Where a supply of services spans the change of rate (i.e. some services are performed before and some after 1^st January 2010), it is possible to apportion a fee received after 1^st January 2010 so that so much of the fee as relates to work done before 1^st January 2010 is charged at 15%[6].

• 11. In practice, for ongoing matters, it may be simplest to issue fee notes in early January 2010 (or immediately before Christmas 2009), covering the work done to date with VAT shown at 15%. Even if the client does not pay immediately, the barrister and his clerk will have a contemporaneous record rather than having to perform the apportionment months or even years later. A separate fee note can be issued with VAT at 17.5% for all work done after on or after 1^st January 2010.

Flat-rate scheme

• 12. The Revenue have stated that from the 1^st January flat rates will broadly return to their November 2008 levels though they will publish final rates in late 2009. If this means a barrister wants to leave the scheme they can do so, though this will be somewhat more complex if done in the middle of an accounting period.

• 13. Those using the flat-rate scheme will generally account for VAT quarterly and some will have a quarter that spans the rate change (e.g. one covering December 2009, January 2010 and February 2010). Such barristers should apply the 15% rate to receipts before 1^st January 2010 and the 17.5% to receipts on or after 1^st January 2010 (assuming they use the cash-based turnover method).

Pre-payments and anti-avoidance

• 14. In the normal course of things, barristers are paid after the work has been done, and issue VAT invoices after payment has been received. This means that the usual "tax point" for work done after 1^st January 2010 will be the date of payment, and the rate of tax will be 17.5%. If, however, a barrister had been paid before 1^st January 2010 for work to be done after that date, the rate of tax would be 15%. Similarly, if the barrister had issued a VAT invoice (not just a fee note) before 1^st January 2010 for work to be done after that date, the rate would be 15% (although in this case the barrister might have to account for the VAT before receiving payment).

• 15. This result is subject to anti-avoidance rules introduced in Finance Act 2009[7]. These apply in various situations including where:
• (a) the barrister issues a VAT invoice that does not have to be paid in full within six months; or
• (b) the payment or VAT invoice is in excess of £100,000, and this is not normal commercial practice.

At first glance, it might seem that these would apply to relatively few barristers.  However, (a) since invoices are generally issued by barristers after receipt they will not generally show a date for payment and (b) it may be difficult to show that large pre-payments (let alone invoices) are normal commercial practice.  A normal payment on account (i.e. one that would be made regardless of the change of rate) should not be caught.

Summary

• 16. In general, barristers can choose to charge and account for VAT at either the rate in force when the work was done or the rate in force when the fee is received. Assuming barristers will wish to charge the lowest rate (and ignoring prepayments and flat-rate scheme), this means:
• (a) Work between 1^st December 2008 and 1^st January 2010 can be charged with VAT at 15%.
• (b) Work done on or after 1^st January 2010 must be charged with VAT at 17.5%.
• (c) Work done before 1^st December 2008 can be charged with VAT at 15% if the fee is received before 1^st January 2010 but must be charged with VAT at 17.5% if the fee is received on or after that date.
• (d) Where work on a single matter spans a change in rate, the fee can be apportioned so that work done before 1^st January 2010 (but after 1^st December 2008) can be charged with VAT at 15%.

FAQs

Note 1: In these questions, it is assumed that "fee notes" are not VAT invoices.

Note 2: These questions are being asked on or after 1st January 2010.

•1.      I am just about to send out a fee note for work done before 1st January 2010 - what rate of VAT should I charge?

You can choose which rate to apply.  The client will generally prefer the 15% rate (see paragraph 8).

•2.      Do I have to reissue fee notes for work done before 1st January 2010?

No, there is no need to reissue fee notes, although you could do so if convenient or on request.

•3.      I have just been paid for work I completed before 1st January. The payment includes VAT at 15% as on the fee note. What rate of VAT should I include on the VAT invoice? Do I have to seek a payment of the 2.5%.

You should issue a VAT invoice showing VAT at 15% and account for that amount as VAT.

•4.      I have an ongoing case with some work before and some work after 1st January 2010. I have not yet been paid. Do I have to issue separate fee notes and/or invoices (some charging VAT at 15%, others at 17.5%)?

You are entitled to apportion the work between periods before and after 1^st January 2010 and charge the different rates of VAT as appropriate but you do not have to issue separate fee notes.  You could show difference rates on the same fee note (and invoice). 

•5.       I am being paid in instalments for an ongoing case. The first instalments have been billed and paid with VAT at 15%. The most recent fee note sent out showed VAT at 15%. Do I need to reissue the fee notes? Or is it OK to switch to 17.5% for future fee notes only?

Provided the most recent note relates to work done before 1^st January 2010, you do not need to reissue the fee notes but should switch to 17.5% for future fee notes (but only if they relate to work done after 1^st January 2010).

•6.      I have just been paid for work completed in May 2008.  The latest chasing fee note was sent in November 2009 and so the fee included VAT at 15%.  What should I do?

You have to account for VAT at 17.5% since that was the relevant rate both when the work was done and when the fee was received.  You can either ask your client for a further 2.5% or bear the extra VAT yourself.

Software Suppliers to Chambers

The three major software suppliers will be providing advice to their customers.

• Chambers using Lex Chambers' Management should refer to the news section of the Bar Squared website http://www.barsquared.com/

• Chambers using InQuisita Law will each be sent guidance notes directly.

• Chambers using Meridian Law or Meridian Law Connected should refer to the IRIS website http://www.iris.co.uk/customer_support.aspx to download documentation. Customer support can be contacted on 0845 345 1069 or a training session can be booked with the training dept on 0207 842 6000.

[1] See VAT (General) Regulations 1995, S.I. 2518, Regulation 92

[2] With an option to defer to date of receipt: see section 5.16.4 of the Bar Council's Taxation and Retirement Benefits Handbook (5th ed), a. copy of which was supplied to every chambers. More copies can be ordered via the Bar Council website: http://www.barcouncil.org.uk/guidance/taxationandretirementbenefitshandbook4thedition/. It is also reproduced in its entirety in The Bar Handbook  http://www.barcouncil.org.uk/memberservices/BarHandbook200910/

[3] See section 5.18 of the Taxation and Retirement Benefits Handbook (5th ed).

[4] VATA 1994 s 88(2) applied to reg 92 and therefore barristers by reg 95.  See section 3.2 of the HMRC guidance.

[5] See section 2.5 of the HMRC guidance for the form of the credit note.

[6] See section 3.4 of the HRMC guidance.

[7] See Schedule 3.  Detailed guidance on the legislation can be found at http://www.hmrc.gov.uk/vat/forms-rates/rates/anti-forestall-guidance.pdf

23.11.2009