Home: News & Events: News

VAT New Rate – what you need to do

The Chancellor announced in his 2008 Pre-Budget Report that the standard rate of VAT will be reduced from 17.5% to 15% with effect from 1 December 2008 until 31 December 2009. The standard rate will revert to 17.5% on 1 January 2010.

The VAT rate to be applied is determined by the tax point rules, which determine the date when a supply is deemed to be made. Standard rated supplies made up to and including 30 November 2008 will be subject to VAT at 17.5%, while those made on or after 1 December 2008 and before 31 December 2009 will be subject to VAT at 15%. However, the position is complicated by optional “change of rate rules” that taxpayers may use.

Tax Point Rules
To work out when a supply takes place you need to use what are know as the time of supply or tax point rules. They are what you use to decide when to account for the supply on your VAT return. So they are even more important on occasions such as when the VAT rate changes.

The following tables describe how basic and actual tax points work for many people.

Basic Tax Point

If you supply...	The basic tax point is...
Goods	Usually the date when you send them to your customer or the customer takes them away.
Goods but they are not sent or taken away (for example because you put them together on your customer’s premises)	The date you make them available for your customer to use.
Services	The date when the service is performed (normally taken as the date when all the work except invoicing is complete).

But whether you supply goods or services, the basis tax point is overridden if an actual tax point is created.

Actual Tax Point

If you...	Then the...
Either issue a VAT invoice or receive a payment before the basic tax point.	Tax point for the amount you invoice or receive is the date you issue the invoice or receive the payment, whichever happens first.
Issue a VAT invoice up to 14 days after the basic tax point.	Date when you issue the invoice becomes the tax point.

Applying these tax point rules on 1 December 2008
Where a tax point occurs before 1 December 2008 the supply (or the part of it covered by the tax point) will remain liable to VAT at 17.5%. Tax points occurring on or after 1 December 2008 will be liable to VAT at 15%. In many cases a supply will have a single tax point – for example, if you are a retailer, and a customer enters your shop and pays cash for an item which they take away with them. The tax point occurs when the goods are handed over and paid for. So where this happens before 1 December 2008 the supply is liable to VAT at 17.5%. On or after 1 December 2008 the supply will be liable at 15%. In other situations there can be two or more tax points. For example, you may receive a deposit for goods to be delivered later. This makes the position less straightforward. Here, a deposit received before 1 December 2008 will be liable to VAT at 17.5%. However, if the goods are not delivered (and the balance of the price is not invoiced or paid for) until on or after 1 December 2008, the 15% rate will apply when it comes to accounting for the remaining VAT that is due. However, special change of rate rules which are described below come into affect.

Special Rules that may apply at 1 December 2008 to supplies of goods and services that span the rate change
There are special rules that you can opt to apply.
For the decrease in the VAT rate, the main benefit of the special rules is to allow you in certain circumstances, to adjust any VAT accounted for at 17.5% before 1 December 2008. This can be illustrated by the following example:

A supply of goods where the customer pays a deposit when the order is placed

• On 1 November 2008 you receive an order for a supply of furniture not currently in stock.
• The customer pays 10% deposit at that time which included VAT at 17.5%.
• There is a six week delivery period but, in the meantime, on 1 December 2008, the rate of VAT is reduced to 15%.
• The goods are eventually delivered on 15 December 2008.

A tax point occurred on 1 November 2008 when you were required to charge the customer VAT at 17.5%. But because the goods will not be delivered until after the decrease to 15%, you can adjust the amount of VAT previously accounted for by recalculating it at 15%. If you have already issued a VAT invoice showing the old rate of tax, you will need to correct it by issuing a credit note.

Other rates of VAT not affected
This change in the standard rate of VAT does not affect sales of goods or services that are charged at another rate of VAT. These are:

• Zero rated – for example most foodstuffs, children’s clothing or books;
• Reduced rated – for example children’s car seats, domestic supplies of fuel and power, and
• Exempt – for example education, health and financial services

Other “change of rate” implications
The VAT fraction to calculate the 15% VAT element within a VAT-inclusive value is 3/23 (previously 7/47).

Cash Accounting Scheme
The cash accounting scheme does not determine when a VAT supply is made; it simply determines when the VAT on the supply has to be declared to HMRC. This means that VAT will be due at 17.5% on supplies made before the rate change, even if you receive payment after the change. When you receive payments after the rate change you will need to identify those payments which relate to supplies before the rate change and on which VAT is still due at the previous 17.5%.

Flat Rate Scheme
The table of flat rates has been changed to reflect the new rate of VAT. A copy of the new table can be obtained from HMRC or from their website www.hmrc.gov.uk

Refunds
If you give a refund on or after 1 December 2008 for a sale you make before 1 December, you will have to adjust your daily gross takings to take account of the VAT originally charged at 17.5% by using the VAT fraction of 7/47.

Deposits
You should account for VAT on deposit at the rate in force when you received it. If you receive a deposit before 1 December 2008 for goods or services that you will supply after the rate change you have the option of applying the 15% rate of VAT.

Credit Notes
If a VAT credit note is issued in respect of standard rated supply after the change of rate, it must show that VAT rate applicable to the original supply.

Construction Services
If you make supplies (including design, advisory and supervisory services) under a construction contract which involves your customer making stage payments, the tax point is normally the time you issue a VAT invoice; or receive a payment, whichever happens first.

Changes to your accounting system
You should ensure that the standard rate of VAT is changed as of the 1 December 2008. You should contact your software provider to ensure that any changes are correctly applied.

Do you need help?

Should you have any difficulties in these new VAT changes, then please contact our Business Services Team on 029 2054 9939 or email them at business@broomfield.co.uk