On 4 January 2011 the standard rate of VAT will rise from 17.5% to 20% – the third change in the standard rate in the last two years. This impending rise may have prompted some savvy partners to buy their new refrigerators or computers now instead of next year, but major appliance purchases shouldn’t be the only thing on their minds.

The VAT rise will of course impact on legal firms, and planning for the increase should be top of the agenda for partners and firms as the year draws to a close. By now legal firms will be well versed in how the VAT changes work, but nonetheless it is worth highlighting a few important issues.

Back to basicsThe basic tax point – or the date when VAT becomes chargeable – for service providers is normally when the service is completed. However, this point in time can be shifted by clients making an earlier payment, or the firm raising an invoice in advance.

Invoices raised ahead of the VAT rate change will trigger the current 17.5% rate instead of the new 20% rate, as long as the amount invoiced in advance does not exceed £100,000 and the terms of the invoice require payment within six months. For clients who cannot fully recover VAT charged to them, this will potentially be an attractive option, so firms should consider accommodating them.

Special rules – apportionmentThere are VAT rules in place which enable legal firms to apportion the VAT on services which began before and ended after the VAT rise, if they wish. For example, a legal firm completes its service to a client on 10 February 2011 and the work began on 1 December 2010. The firm can, if it wishes, raise an invoice with a VAT rate of 17.5% for work undertaken in the period 1 December 2010 to 3 January 2011, with the remainder of the work chargeable at 20%. The alternative would be, of course, to invoice all the work at 20%.

Firms should keep in mind that this ‘facilitation’ of apportioning the fee will be especially important to private clients and businesses involved in the VAT exempt sector, such as finance and insurance businesses and charities.

Legal firms are not obliged to operate this apportionment option, but my experience has shown that clients who cannot recover their VAT will probably challenge the VAT rate if you have not followed the apportionment option.

It is important to note that you can only retrospectively amend an invoice charged at 20% VAT to reflect the apportionment option until 21 February 2011. Thereafter the original 20% invoice has to remain unchanged.

The countdown to the VAT rise has begun – best to end the year and start the new one prepared.

Louis Baker is head of the professional practices group at Crowe Clark Whitehill