Temporary Change to VAT - The Practical Implications

How will the changes in VAT affect you?

26.11.2008

How will the changes in VAT affect you?

The Chancellor announced in his Pre Budget Report that the standard rate of VAT will decrease (from 17.5%) to 15% from 1 December 2008 for the period to 31 December 2009.

Those who will benefit from the changes are:

  • Individual consumers who will see the price of standard rated goods and services reduce (where retailers pass the rate cut on);
  • Businesses or organisations in the exempt and non-business sector that will see a reduction in costs, as the irrecoverable VAT they suffer on standard rated goods and services will decrease.

Retail businesses, who may be under pressure to pass the rate cut on, are likely to suffer administrative costs implementing price changes across product lines within days.  Changes will however need to be made to accounting systems to ensure that VAT is recorded correctly.

There are other implications and actions that apply.  The following notes offer some practical guidance on the affect of the change.

What VAT Rate applies?

Businesses accounting for VAT on an invoice basis should apply the rate of VAT in force at the time they issue (or are obliged to issue) a VAT invoice.  Invoices issued before 1 December 2008 will be subject to VAT at 17.5% and invoices issued on or after 1 December 2008 will be subject to VAT at 15%.  It is important that tax point rules are recognised as well as the requirement to issue an invoice within 14 days of one being created as both will have an impact on the VAT rate charged.

Businesses and organisations that use the cash accounting scheme are not liable for VAT on their supplies until they receive payment.

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Options for Supplies spanning the change of rate

You have a choice of VAT rates where supplies span the change of rate.  Where a payment is received or invoice is issued using the old 17.5% rate before 1 December 2008 for goods or services that will be provided after 1 December 2008, you can,

- Charge VAT at 17.5% and account for that to HMRC; or
- Account for VAT at the new rate of 15% on the amounts received or invoiced.

 A credit note should be issued to refund the VAT difference to the customer if a VAT invoice has already been issued showing the old rate of VAT. 

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Credit Notes

VAT credit notes or debit notes relating to a supply of goods or services which contain a VAT adjustment should show VAT at the rate in force at the time the original invoice was issued.

Accounting systems must again be capable of raising credit or debit notes referring directly to the VAT rate applied on the original invoice.

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VAT Fraction

For cash businesses who need to work out the VAT element of cash received, the new VAT fraction of 3/23 will give the amount VAT at the 15% rate.

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Deposits received before 1 December 2008
VAT should be accounted for on a deposit at the rate in force when it is received.  If a deposit is received before 1 December 2008 for goods or services that will be supplied after the rate change, the supplier has the option of applying the 15% rate of VAT and crediting the 2.5% VAT difference charged on the deposit.

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Construction contracts

The tax point for construction contracts (which can include design, advisory and supervisory services) is the earlier of the time an invoice is issued or a payment is received.  If you are carrying out work under a stage payment contract on 1 December 2008 any VAT invoices you issue or payment you receive on or after that date will be liable to VAT at 15%.  This applies even if some of the work was actually performed before 1 December.

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VAT on expenses & overheads
Computerised accounting systems should be revised to record the new standard VAT rate applicable from 1 December 2008.
This may require the creation of a new tax code so that the system can process invoices received containing the 17.5% rate and the 15% VAT rate.  Consideration will also need to be given to changing the coding of services received from abroad that are subject to the reverse charge.

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Stock on hand on 1 December 2008
Persons who are registered for VAT on 1 December 2008 should account for VAT at the 15% rate on stock supplied after that date even though they may incur 17.5% VAT when they purchased the stock.  Such persons could be entitled to a credit for VAT on the purchase of that stock, subject to the usual conditions.

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VAT returns
Businesses and organisations completing VAT returns for a VAT return period including 1 December 2008 will have to account for VAT inputs and outputs at both the 17.5% and the new 15% rate.  All output tax due should be included in Box 1 of the VAT return as normal.

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Quotes, contracts and price lists

Businesses and organisations may have to consider revising price lists, web site information, publications and quotes or contracts that have been issued in advance of a supply taking place after the VAT rate change.

Existing contracts that have been entered into at one VAT rate may require to be adjusted to correspond with VAT invoices and accounting procedures and to ensure that the reduced rate is recorded correctly.

Given the fact that the new VAT rate will become effective in a number of days, businesses and organisations should prioritise the practical implications of the change. 

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Changes to the Flat Rate Scheme 

The Flat Rate scheme simplifies VAT administration for lower value turnover businesses.  It allows them to account for VAT on a flat rate percentage according to their particular sector.  Previously there two tests to determine whether a business could use the scheme.  One has been removed, and now a business must only have an annual VAT-exclusive turnover of up to £150,000 to be eligible for the scheme.

HMRC have also adjusted the output tax percentages used by the flat rate scheme to coincide with the reduction to the standard rate of VAT.  Details of the specific percentages have been published on HM Revenue & Customs’ website and should be consulted by any business using this scheme.

The cash accounting and annual accounting schemes remain unchanged.

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Opportunities

The VAT rate decrease provides an opportunity for business to consider slightly delaying a bill to benefit from the 15% rate. This would be most appropriate where goods or services are being supplied to non VAT registered customers at the standard rate of VAT.  Equally, charities and VAT averse businesses should consider bringing forward tax points on any major expenditure pencilled in for early 2010 to the end of 2009 to benefit from the lower rate (although see the legislation regarding anti-forestalling measures).

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Anti-Forestalling Measures

Along with the rate change legislation, measures will be introduced to prevent artificial structures that are designed to reduce the VAT rate on supplies of goods and services after the VAT rate returns to 17.5% where there is no genuine commercial activity.  Genuine commercial transactions are not affected but large scale advance payments are likely to be the target of these measures.

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Change to VAT rate benefits those using Lennartz VAT Accounting

The Lennartz mechanism allows businesses that have purchased assets that will be put to a mixture of business and non-business use recover the VAT incurred.  The downside is that during the economic life of the asset (usually 10 years) the business must account for output tax on the “deemed self supply” of the asset.  The value of the deemed self supply is calculated by the application of a specific formula.

Projects completed and goods purchased before 1 December 2008 will incur and be able to recover VAT at 17.5% however future output tax charges that will take account of non-business use will have to be calculated using the standard rate of VAT at the time the adjustment is due.
 
As the VAT rate will be reduced to 15% in the period from 1 December 2008 to 31 December 2009 output tax charges could therefore be reduced.  This could result in VAT savings for all businesses that have already brought an asset within the Lennartz mechanism.

The change in the VAT rate should not affect adjustments due for assets being monitored under the VAT Capital Goods Scheme.

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Please feel free to contact the Scott Moncrieff VAT Team if you would like to discuss these or any other VAT issues:

Edinburgh

Scott Craig: scott.craig@scott-moncrieff.com
Alan Glen: alan.glen@scott-moncrieff.com
Iain Masterton: iain.masterton@scott-moncrieff.com

Tel: 0131 475 3500

Glasgow

Greg McNally: greg.mcnally@scott-moncrieff.com
Anthony Cochrane: anthony.cochrane@scott-moncrieff.com

Tel: 0141 567 4500

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