As widely leaked/predicted the standard rate of VAT has been reduced to 15% from 1 December 2008. This reduction will be effective for a fixed period of 13 months. From the 1 January 2010 the rate will revert to 17.5%.
For VAT registered traders this creates a number of practical problems and issues, which we try to help with here
- All sales on or after 1 December 2008 should be charged plus 15% VAT.
- Zero rated, reduced rate and exempt sales or supplies are unchanged.
- Retail businesses should use the new 15% rate on all takings received on or after 1 December 2008 – unless the customer took delivery before 1 December, in which case you should apply the 17.5% rate.
- If you supply goods or services to other VAT registered customers and need to issue tax invoices, you should add on 15% VAT to all invoices dated 1 December or later – except where you provided the goods or services more than 14 days before you issued the VAT invoice. For example, if you issue a VAT invoice on 1 December for goods or services provided before 18 November 2008, or you were paid before 1 December. In these cases, your sale takes place before 1 December and you must use the old rate of 17.5%. Note if you received part payment before 1 December, use the old rate for the part payment.
- Under the normal rules all invoices issued and all payments received before 1 December 2008 are subject to VAT at the old rate- 17.5%. There are also optional rules that you can adopt. See section 3 of the HMRC publication recommended at the end of this article for more information on these special rules.
- If you need to work out the 15% VAT charged in a VAT inclusive amount, multiply by the fraction 3/23.
- If you have point of sale tills etc that produce a VAT inclusive receipt you may need to contact your supplier to ensure the VAT rate applied is changed for sales after 1 December.
- If you want to reduce your current (pre 1 December) sales price to reflect the reduction in VAT to 15%, multiply your old price by 115/117.5, this is equal to 46/47.
- Are you required to pass on the reduction in VAT to your customers? The answer is no – its entirely up to you. Many retailers and other businesses will choose to improve their own margin.
- If your VAT return period does not begin on 1 December, you will have account for VAT in the quarter which straddles this date accommodating both rates of VAT. If you use software to produce your VAT returns your supplier should be able to advise you on this.
- Make sure that you follow your accounts software supplier’s instructions regarding the change in VAT rate. If you use Sage Line 50 accounts software you can download instructions from the Ask Sage area, article number 22856 for the standard VAT scheme, and article 22857 for the cash accounting scheme.
HM Revenue & Customs have published a comprehensive guide to the VAT change. You can download it at:
http://www.hmrc.gov.uk/pbr2008/vat-guide-det.pdf. It is quite a large PDF document. If you need specific advice on any aspect of the change please call.