The new VAT rate in FreeAgent

New year, new VAT rate, for our UK customers!

On 4th January 2011 the standard rate of VAT in the UK will change from 17.5% to 20%.

How will FreeAgent handle that change?

We’ve made it as automatic as we can.

The 20% VAT rate is available for you to choose when you’re entering transactions, for example invoice items, bills and bank payments.

“Auto” VAT will be updated to 20% for all standard-rated categories, for any transactions dated on or after 4th January 2011.

The VAT flat rate percentages will be updated to the new rates for any invoices dated on or after 4th January 2011.

Invoices created from recurring profiles on or after 4th January 2011 will show 20% VAT. (The original profile will still say 17.5% or 15%, but new invoices from the profile will be at 20%.)

Invoices converted from estimates after 4th January 2011 will have a rate of 20% VAT.

All price list items set with VAT at 17.5% will be updated to VAT at 20% automatically at the right time. (In our next release we’ll put in a “Standard” rate for price list items.)

Some things to be aware of

If you’re cash accounting for VAT, and you issue an invoice in December with 17.5% VAT on it, then receive the money in January, FreeAgent will put 17.5% VAT on your VAT return. That’s correct because the VAT payable depends on the rate in force at the time you issued your invoice.

This also holds true if you’re on the VAT flat rate scheme on a cash basis. FreeAgent will apply the correct flat rate percentage based on the rate in force when the invoice was issued - not when the money came in.

That doesn’t sound right.

We promise you it is! HM Revenue say so for cash and for flat rate.

What about if I make a sale spanning the change, what rate should I use?

Briefly, if you're providing goods or services before the change, then invoicing afterwards, you can choose to use 17.5%.  And if you do some work before and some work after the change, on the same invoice, you'll need to split the work between the rates.

HM Revenue explain more here - scroll down to "Sales that span the change in rate".