VAT Rate Changes
Increase in the standard VAT rate - from 1 January 2010
The standard rate of VAT was temporarily reduced to 15 per cent on 1 December 2008 and will return to 17.5 per cent on 1 January 2010.
Businesses should be considering now how this rate change will affect them and their customers. In particular, consideration should be given to the pricing of goods and services, the timing of the rate change and associated administrative issues specific to individual businesses.
For any sales of standard-rated goods or services that you make on or after 1 january 2010, you must charge VAT at the rate of 17.5 per cent. If you have a cash business and calculate your VAT using the VAT fraction, you must revert to the VAT fraction of 7/47ths from 1 January 2010.
1: pricing Decisions
Businesses making supplies subject to VAT at the standard rate need to decide whether to pass on the VAT ratt increase to their customers or aborb the costs.
Where supplies are made to business customers that are able to reclaim the VAT in full, the VAT rate increase should be passed on without significant issues. A possible issue may be cash flow, according to how quickly they can claim credit for the additional input VAT incurred.
Where supplies are made to exempt businesses (e.g. those operating in the financial, insurance, education health and property sectors) there may be resistance to the VAT rate increase. Similarly, businesses supplying direct to consumers may need to consider whether to pass on the VAT increase through higher prices.
2: how to account for the VAT rate change
The way that you should account for the change in the VAT standard rate depends upon the type of business you have.
If you are a retailer you must use the 17.5 per cent rate for all takings that you receive on or after 1 January 2010. But, if your customer pays after 1 January for something they received (or delivered) before 1 january 2010, you should use the 15 per cent rate.
Businesses that issue VAT invoices
you must use the 17.5 per cent rate for all VAT invoices that you issue on or after 1 January 2010. But, see the section below on special rules for sales that span the change in rate.
Businesses operating beyond midnight on 31 December 2009
Special arrangements have been set up to help you account for the changes in the VAT standard rate, if you are:
- a pub, club, restaurant or similar establishment
- a retail shop
- a provider or telecommunications
...and you business will be operating beyond midnight on 31 December 2009. Sales to the earlier of clocing time or 6am on 1 January 2010 can be treated as subject to VAT at 15 per cent.
3: Sales that span the change in rate
There are special rules for sales which span the change of rate. If you provide goods or services before 1 January 2010 and raise a VAT invoice after that date you can choose to account for VAT at 15 per cent. You don't need to tell HMRC if you do this.
The special change of rate rules are optional - you do not have to apply them and you are unlikely to want to if your customer can recover all the VAT you charge them (unless it is administratively more convenient for you).
Goods or services provided before 1 January 2010
The change of rate rules may be used where you provide goods or perform services before 1 January 2010 and raise a VAT invoice and, in some cases, receive a payment after the rate change. So, for example, if you issue a VAT invoice after 1 January 2010, for goods you provided or services that you completed before 1 January 2010 you can if you wish, apply the 15 per cent rate.
You can decide to apply these rules even after you have issued a VAT invoice showing 17.5 per cent VAT. If you do, you must issue a special credit note giving credit for the extra 2.5 per cent VAT within 45 days of the rate change (i.e by 14 February 2010). You should not cancel the original invoice.
Services you start before 1 January 2010, but finish afterwards, you may account for the work done up to 31 December 2009 at 15 per cent and remainder at 17.5 per cent. If you choose to do this you will have to be able to demonstrate that the apportionment is fair.
Continuous supplies of services
If you provide a continuous supply of services, such as leasing of photocopiers, you should account for the VAT due whenever you issue a VAT invoice or receive payment, whichever is the earlier. You must charge 17.5 per cent on invoices you issue and payments you receive on or after 1 january 2010. You may, if you wish, charge 15 per cent on the services you've provided in the period up to 31 December 2009 and 17.5 per cent on the remainder. If you choose to do this you will have to be able to demonstrate that the apportionment is fair.
Landlords will need to ensure that they charge VAT at 17.5 per cent for supplies made after 1 January 2010. This should not impact on tenant where they are able to reclaim the VAT. Landlords can opt to use the special rate change rules where rent is paid or invoiced in arrears and the rent period spans the 1 January 2010 date. In this situation, a Landlord can charge VAT at 15 per cent for the period up to 1 January 2010 and 17.5 per cent thereafter, on a time appotioned basis.
4: Raising VAT invoice or receive prepayment before 1 January 2010 for goods or services which you will provide on or after that date VAT will normally be due at the 15 per cent rate. In certain circumstances VAT is due at a rate of 15 per cent on the date of issue of the VAT invoice or receipt of payment before 1 January 2010 and a supplementary charge of 2.5 per cent then becomes due on the 1 January 2010.
5: Special VAT scheme
If you use the Cash Accounting Scheme you will need to be able to identify payments received after 1 January 2010 that relate to supplies made before that date. VAT at a rate of 15 per cent will be due on these payments.
Annual Accounting Scheme
Your instalments will not be affected by the change in the standard VAT rate.
Flat Rate Scheme
On 1 January 2010, the flat rates will broadly return to their November 2008 levels. HM Revenue & Customs will be reviewing the rates to check that they accurately reflect the VAT paid by businesses in each sector. Some adjustments may therefore be necessary. The flat rates will be finalised and published towards the end of 2009.
6. What VAT you can reclaim
You can claim back the VAT you have been charged by your supplier in the normal way. You will still be receiving invoices after 1 January 2010 showing 15 per cent VAT relating to purchases you have made before the rate change. In these cases you should claim back VAT at 15 per cent.
7. Anti-forestalling measures
Anti-forestalling measures have been brought in to impose a charge of 2.5 per cent on artificial arrangements entered into to take advantage of the 15 per cent VAT rate, for example by prepaying for goods and services or issuing a tax invoice where the goods or services are consumed after 1 January 2010.
8. How to complete your VAT return
You should continue to receive and submit VAT returns in the normal way - monthly, quarterly or annually. The deadlines for submitting your VAT returns and making payments are unchanged. For return periods that cover both before and after 1 January 2010, you will need to add together the VAT on sales charged at 15 per cent and the VAT on saled charged at 17.5 pre cent to work out the total VAT on sales to be included in box 1 of your VAT return.
9. How to correct an error on your VAT return
If you discover that you have made an error you can correct it in the normal way by making a voluntary disclosure or correcting it on your next return (subject to the normal limit).
If you do make mistakes accounting for the change of rate on your first VAT Return after the change, HMRC will only seek an adjustment if there is likely to be an overall revenue loss.
Disclaimer: Please note that the above has been posted purely for the purpose of general information only and guidance in the public domain and is not intended to provide specific advice on the application of the VAT rules to individual businesses or clients. It is highly recommended that detailed advice is sought before taking any action and no responsibiility can be taken for any loss arising from any action taken or refrained from the basis of the above information.