The recent announcement that the temporary reduced VAT rate of 5 percent for the hospitality sector is to be extended until 30 September 2021 will have been welcome news to those affected businesses. On 3 March 2021, the Chancellor further announced that a new VAT rate of 12.5 percent is to apply to the affected supplies from 1 October 2021 to 31 March 2022. These measures are being implemented to support businesses affected by mandatory closures and forced social distancing during the COVID-19 pandemic.

The measures announced may bring welcome news, but how are these changes in VAT rates dealt with practically? In this article, we will take a look at the tax point rules and the special change in VAT rate provisions that can apply.

Basic tax point rules

In respect of the provision of services, the basic tax point is when the services are performed or completed.

Override to basic rules

The basic tax point may be overridden in certain scenarios.

The tax point may be shifted to an earlier date where there is a receipt of a payment or a VAT invoice is issued on a date before the basic tax point date. In both of these cases, the earlier date becomes the actual tax point date that should be used. These rules also apply where payments are received in advance of the supply being made.

The basic tax point can also be overridden if a VAT invoice is issued in the 14-day period after the basic tax point date, i.e., the later date becomes the actual tax point date. This can only apply where payment has not already been received. Taxpayers may waive this 14-day rule where they do not wish the later date to become the tax point.

Continuous supplies of services

In addition to the above, there are special tax point rules concerning “continuous supplies of services”. These rules apply in situations where the services are never deemed to be completed because they are continuous, and where invoicing or the receipt of a payment does not occur at least once in each twelve-month period. In this situation, a tax point is deemed to arise on 31 December of each year, even where no payment has been received and a VAT invoice has not been issued.

Where it is the case that the taxpayer supplies services on a continuous basis and receives regular payments, a tax point arises at the time a VAT invoice is issued, or payment received – whichever happens first.

However, where payments are received on regular intervals by banker’s order or direct debit, the taxpayer may issue a VAT invoice at the start of the period to cover all payments to be received. For each payment, the following should be set out on the VAT invoice:

• VAT exclusive amount
• Date payment is due
• Rate of VAT chargeable
• VAT payable

Where these actions are taken, the taxpayer may choose to account for output VAT at earliest of (a) the due date of each payment, or (b) the date each payment is received.

Changes in VAT rate

Where a change in VAT rate occurs, VAT is chargeable in accordance with the normal tax point rules as outlined above i.e., the tax point occurs at the earlier of the date payment is received, or the date of issuance of a VAT invoice.

However, taxpayers may choose to adopt the special change of rate provisions. As part of these special provisions, the taxpayer may choose to adopt the basic tax point rules which say that the tax point is the date when the services are performed or completed.

In cases where services are performed, and payments are made, throughout the year, it would appear reasonable to assume a basic tax point each month. The taxpayer may therefore apportion the annual charge levied so that some months are chargeable at the old VAT rate, and other months are chargeable at the new VAT rate.

Final points

In the case where a taxpayer has chosen to adopt the special change of rate provisions to shift the tax point and has applied for a refund to HMRC in respect of previously overpaid output VAT, and the taxpayer chooses to retain the benefit of the refund and not pass this back to the customer, we should in normal circumstances also consider the risk of challenge from HMRC under the “unjust enrichment” provisions.

Unjust enrichment is a HMRC defence for taxpayer claims of overpaid output VAT. HMRC can only invoke the defence of unjust enrichment where they can show that someone other than the taxpayer effectively bore the burden of VAT i.e., where the customer paid the incorrect higher rate of VAT, and the taxpayer retained the benefit of the refund.

That being said, given the extension of the reduced VAT rates are designed to stimulate the hospitality and leisure sector as a result of the pandemic, it does not appear that this defence would be applicable to HMRC where the taxpayer reasonably invokes their right to use these special tax point rules for the purposes to which they are designed for.