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In the pre-budget report, it was announced that the VAT rate will be decreasing from 17.5% to 15%, from 1st
December 2008. Below is a summary of frequently asked questions relating to these changes to help you overcome any problems you may occur.
For ease of use this guidance is provided in the form of answers to frequently asked questions. If you have any further queries then please, call your usual LB Group contact.
1 SALES
1.1 When should I start charging VAT at 15%?
You should charge standard rate VAT at the new rate of 15% for any sales of standard rated goods or services that take place on or after 1 December 2008.
1.2 Are other rates of VAT affected?
No. This change in the standard rate of VAT does not affect sales of goods or services that are charged at another rate of VAT, such as Zero rated reduced rate or exempt.
1.3 Which of my sales are affected?
This depends on how you account for VAT: -
If you are a retail business making mainly cash sales to non business customers ( e.g. shops, restaurants. hairdressers) and do not have to raise a VAT invoice you must use the new rate for all takings you receive on or after 1 December 2008.
The exceptions are where your customer pays for something they took away before 1 December. (e.g. where trade customers have an account)
If you are a business that sells mainly to other VAT registered businesses and have to issue VAT invoices you must use the new rate for all invoices you issue on or after 1 December 2008.
The exceptions are where you provided goods or services more than 14 days before you issue the VAT invoice, or you were paid before 1 December 2008. In these cases you must use the old rate of 17.5%.
1.4 My prices are VAT inclusive. How do I calculate the new rate?
If you´ve charged a VAT inclusive price, you should use the VAT fraction to work out the VAT element. The VAT fraction for the 15% rate is 3/23.
1.5 How do I correct VAT charged at the wrong rate?
If you charge the wrong rate of VAT on an invoice in error you will need to provide your customer with a credit note to correct the position. A credit note should contain the following details:
- the identifying number and date of issue of the credit note;
- your name, address and VAT registration number;
- your customer´s name and address;
- the identifying number and date of issue of the VAT invoice;
- a description which identifies the goods or services supplied; and
- the amount of VAT being credited.
Any credit note issued in accordance with the special rules for sales that span the change in rate (see section 3) must be issued within 45 days after 1 December 2008.
1.6 How do I deal with deposits?
You should account for VAT on a deposit at the rate in force when you receive 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 (see section 2).
2 Special Rules for sales that span the change in rate
Under the normal rules, all payments received before 1 December 2008 and VAT invoices issued before 1 December 2008 for standard rated sales will be liable to the old rate of 17.5%. However, there are optional change of rate rules that you may be interested in applying.
2.1 What are these rules?
These optional change of rate rules are for pre-payments and deposits received before a change of rate, but relating to goods or services to be provided after a change of rate. They also apply when VAT invoices are issued before a change of rate which relate to goods or services to be provided after a change of rate.
So, if you received a payment before 1 December 2008, or issued a VAT invoice before 1 December, for goods that you will provide, or services that you will carry out after 1 December 2008, you can, if you wish, apply the 15% rate. You will need to comply with some conditions, which include providing your customer with a credit note (see paragraph 1.5) in cases where you have previously issued a VAT invoice.
PLEASE NOTE THAT THESE RATE RULES ARE OPTIONAL
2.2 How do the rules work?
2.2.1 Goods provided after 1 December
I issued a VAT invoice to my customer before 1 December 2008 for a supply of goods (e.g. a bicycle) that I provide during December 2008. I have charged VAT at 17.5%. Can I now charge VAT on this supply at 15% instead?
Yes. Under the special rules (see paragraph 2.1) you may decide to charge the new standard rate of VAT. If you decide to use the special rule you must issue a credit note to your customer to adjust the amount of VAT charged on any original VAT invoice you issued. This will reduce the amount of VAT you are liable to account for on the sale. If your customer is VAT registered this will reduce the amount of VAT she can recover on the purchase. There is no requirement to issue a credit note if you had not previously issued an invoice.
2.2.2 Services performed after 1 December 2008
I issued a VAT invoice to my customer before 1 December 2008 for a supply of a service (e.g. dry cleaning a suit) that I provide during December 2008 and I have charged VAT at 17.5%. Can I now charge VAT on this supply at 15% instead?
Yes. The position here is the same as in the previous example
2.3 Supplies that are in progress on 1 December
2.3.1 Continuous supplies
Special rules apply if you make a continuous supply of goods or services (e.g. leasing photocopiers). In this case you may, if you wish, account for tax at the new rate on that part of the supply made after the change, even though the normal tax point occurred earlier (for example, where a payment is received in advance of the supply).
If you decide to do this, you should account for VAT at 17.5% on the value of the goods actually supplied or services actually performed before the change in rate, and at 15% on the value of the goods actually supplied or services actually performed after the change in rate. If this procedure reduces the liability to tax of a supply for which a VAT invoice has already been issued at a higher rate, you must issue a credit note in accordance with paragraph 1.5.
2.3.2 Single supplies carried out over a period of time
If you are making a single supply of a service which is nevertheless carried out over a period of time which spans the change in rate (e.g. the service provided by a solicitor in preparing a will) the whole supply can be charged at the new 15% rate. Any VAT already accounted for at 17.5% (e.g. on payments on account made before 1 December 2008) may be adjusted using the special change of rate rules described in paragraph 2.1.
3 Retail business making mainly cash sales to non-business customers (e.g. a shop, restaurant, takeaway, hairdresser)
For most retail sales it is a straightforward matter to decide when to apply the new rate – a customer enters the shop on or after 1 December 2008 and pays cash for a standard rated item which he takes away – VAT of 15% is due.
If you take deposits or make sales on credit, you will need to determine the correct tax point for sales to make sure you use the correct VAT rate
3.1.1 Will I need to change my till and accounting system?
Many retailers have till systems which calculate VAT at the point of sale. If you use an electronic system to record retail sales you will need to make sure it is adjusted to take account of the new rate with effect from 1 December 2008. You may need to consult the manufacturer or supplier of your particular system to find out how to make the necessary adjustments.
Some retail systems will then post VAT to your main accounting records. But other systems will require you to apply the VAT fraction (see paragraph 1.4) to daily gross takings using one of the retail schemes.
There is guidance below on using a retail scheme.
3.1.2 How much do I need to reduce my prices by to take account of the reduction in VAT?
To reduce your VAT inclusive prices to reflect the reduction in the VAT rate to 15% you should multiply your old prices by 115/117.5, which is equal to 46/47.
3.1.3 Do I have to pass on the VAT reduction to my customers by reducing my prices?
The Government is making this change as part of a broader package of fiscal measures to give the economy a boost. Passing on the tax reduction through reduced prices will stimulate consumer spending and mean that both businesses and consumers benefit from this change. But ultimately decisions on prices charged by business and paid by consumers, are for them rather than the Government.
3.1.4 What about retail invoices?
There is no requirement to show VAT or the VAT rate on retail invoices supplied to unregistered customers. However, if you do provide information about the VAT rate and or the VAT charged on your invoices, you will need to change the rates to avoid queries by your customers. If you issue a VAT invoice to registered customers on request, you will need to ensure it shows the correct VAT and VAT rate.
3.1.5 What if I use a retail scheme?
You calculate your daily gross takings in the normal way and apply the new VAT fraction (3/23) to sales on or after 1 December 2008.
3.1.6 What if the VAT rate change occurs part-way through one of my VAT periods?
You will have to make two calculations for that period, one with the appropriate fraction applied to receipts before the change and one with the new VAT fraction applied to receipts after the change. The following paragraphs briefly tell you about the effect on each of the schemes.
3.1.7 I use the Point of Sale scheme – how will the change affect me?
You will have to make sure that any till technology you use to calculate VAT on your transactions is adjusted to reflect the new rate with effect from 1 December 2008.
If your till system does not calculate VAT at the point of sale, and the rate change occurs part-way through one of your VAT periods, then you will need to make two calculations for that period. You will have to make one calculation applying the VAT fraction of 7/47 to your daily gross takings figure from the start of the period up to and including 30 November; and another applying the new fraction of 3/23 to your daily gross takings from 1 December to the end of your period.
3.1.8 I use an Apportionment scheme – how will the change affect me?
If 1 December 2008 falls part way through one of your VAT periods, you will have to make two calculations for that period and add the resulting amounts together to give your VAT liability for the period.
You will also have to make two calculations when making your annual adjustment, one for the period from the start of the year up to and including 30 November; and one for the remainder of the year.
3.1.9 I use a Direct Calculation scheme – how will the change affect me?
When you reduce your prices to take account of the change in rate you will need to adjust your Expected Selling Prices (ESPs) accordingly.
If 1 December 2008 falls part way through one of your VAT periods, you will have to make two calculations for that period, and add the resulting amounts together to give your VAT liability for the period.
Your annual adjustment (if you are on Scheme 2) will also have to take account of any change in your ESPs.
3.1.10 I use a bespoke retail scheme agreement. How will the rate change affect me?
If your scheme contains detailed provisions about the action to be taken when there is a rate change you must follow what it says. If it does not cover this, the general rule is that bespoke schemes are about valuing supplies at different rates and their terms should not be read as implying authority to account for VAT at the wrong rate. The general provisions on change of rate will apply to retailers using bespoke schemes as they apply to other VAT businesses.
3.1.11 What about refunds?
If you give a refund on or after 1 December 2008 for a sale you made 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.
4 PURCHASES
A VAT registered business can claim back the VAT it incurs on standard rated purchases – subject to the normal rules on deducting VAT including any restrictions for purchases used to make exempt supplies. This is normally the VAT that is shown on the purchase invoice. However, following the introduction of the new standard rate of VAT businesses will be receiving invoices showing VAT at the previous rate of 17.5% as well as the new rate of 15%. This section explains what businesses are entitled to recover on their VAT returns.
4.1 What VAT can I claim back on my purchases?
4.1.1 Invoices received at the new VAT rate
I have received a VAT invoice for goods purchased for resale by my business on 1 December. I have been charged 15% VAT. Can I claim it back?
Yes, provided that you could have claimed it back when the rate was 17.5%.
4.1.2 Invoices received at previous VAT rate
I received a VAT invoice from my supplier in November 2008 for a supply of goods he is making in December 2008 and the invoice shows VAT charged at 17.5%. Shouldn't the VAT amount be 15% on this invoice?
Following the change in the VAT rate it is permitted for a supplier to use the special rules to amend the rate of VAT charged where the actual supply takes place on or after 1 December 2008. But he is not obliged to do so and he may opt to leave the VAT charged on the November 2008 invoice at 17.5%.
I received a VAT invoice from my supplier dated 1 December 2008 for goods delivered on the same day. The invoice shows VAT of 17.5%. How much can I reclaim?
You should only treat as input tax the amount you should have been charged. If your supplier incorrectly charges you 17.5% on or after 1 December 2008, treat 15% of the tax exclusive (net) charge as input tax. You may ask your supplier to provide you with a credit note for the over charged VAT.
4.1.3 Less detailed VAT invoices and the VAT fraction
I purchase goods (e.g. petrol) from retail suppliers and receive less detailed VAT invoices for these supplies, which show the VAT inclusive values of the supplies. How do I calculate the VAT I can claim back?
Less detailed VAT invoices show a VAT inclusive value, and the VAT rate applicable, but they do not show the VAT amount separately. To calculate the standard rated VAT element included in this value you must use the new VAT fraction of 3/23.
See paragraph 1.4.
What if the less detailed invoice shows the VAT rate as 17.5% on goods I purchased after the rate change?
You can only treat as input tax the amount you should have been charged. You will need to apply the new VAT fraction of 3/23 to calculate the VAT you can claim.
What if my VAT return covers the change of rate and some less detailed invoices are at the old rate?
You will need to identify those less detailed invoices that were issued with a tax point date up to 30 November 2008 and use the VAT fraction for 17.5%, which is 7/47ths. For the less detailed VAT invoices with a tax point date on or after 1 December 2008 you need to use the VAT fraction for the new standard rate of 15%, which is 3/23.
4.1.4 Invoices with VAT schedules
I have a VAT invoice that includes an annual schedule of monthly charges including VAT relating to a standard rated supply. Do I recover VAT based on the schedule even though the rate is wrong from 1 December 2008?
Amounts shown on the invoice schedule for periods after 1 December cannot be reclaimed as input tax. Your supplier will need to provide an amended invoice schedule for those periods.
4.1.5 Imported services
I receive imported services that are subject to the reverse charge provisions. What rate of VAT do I use?
If you receive services from abroad that are subject to the reverse charge, the tax point is the date you pay for the services. You can use the special change of rate rules in cases where you have paid before 1 December 2008 for single supplies of services completed after, or for continuous supplies that span, that date. For single supplies the VAT can be recalculated at 15% on the full amount and for continuous supplies on the part of the payment that covers the services supplied on or after 1 December (see section 2).
5 WHAT CHANGES DO I NEED TO MAKE TO MY INVOICING AND ACCOUNTING SYSTEMS?
The changes you need to make to your invoicing and accounting systems will depend on what system you currently operate.
5.1 Manual Records
For businesses with very simple manual records only very minor changes may be required. The key issue will be ensuring you enter the correct rate of VAT in your sales and purchase books to record VAT at both the old and new standard rates for at least the first return after the change.
For businesses that rely on more complex electronic accounting systems (including both in-house and off the shelf software) the changes are likely to be more involved.
5.2 Computer systems
I use accounting software to maintain my VAT records, including issuing VAT invoices and posting invoices for expenses and goods and services I buy. Can I continue to use the package following the change in VAT rate, and are there any changes I will need to make?
Yes, you can continue to use accounting software. However, you will need to check that your accounting software can process VAT invoices during the transitional period, when you may be issuing and receiving VAT invoices showing either the 17.5% and 15% VAT rates. You need to ensure that for standard rated supplies of goods or services made or received on or after 1 December 2008 the VAT rate being used and shown on the invoices is 15%.
5.2.1 What if I can´t change my systems in time for the rate change on 1 December 2008?
HMRC recognises that the timescale for making changes is tight. If you can´t make full and final changes to your accounting and billing systems in time that is not necessarily a significant problem – you may be able to make some temporary arrangements or manual adjustments so that you can account for the correct amount of VAT in your first VAT return after the change.
For retailers, the takings you receive from 1 December 2008 onwards will be liable to VAT at 15%. If your systems (including tills) have not been amended to account for 15% (rather than 17.5%) by 1 December, you will need to calculate the VAT manually on your standard-rated takings using the VAT fraction of 3/23.
For businesses issuing VAT invoices, you will need to ensure that you are charging VAT of 15% rather than 17.5% on the invoices you raise for sales made on or after 1 December 2008. For businesses issuing manual invoices this should be straightforward. For those issuing invoices automatically from an accounting system you will need to explore how you change the VAT field from 17.5% to 15%. You may be able to do this yourself or you may need to contact your software provider for assistance. Most software packages should have the in-built capability to deal with changes in rate.
5.2.2 What if I charge my customer the wrong rate of VAT on an invoice?
If you continue to charge 17.5% VAT on invoices raised on or after 1 December, you will need to account to HMRC for that amount. But if you discover that you have charged the wrong rate you can issue your customer with a credit note (see paragraph 1.5), reducing the amount of VAT charged. Once you have issued your customer with the credit note correcting the VAT position you can then reduce the amount of VAT you need to pay over to HMRC.
5.2.3 How do I deal with returned goods – sold before rate change, returned afterwards?
I supplied goods and invoiced my customer in November 2008, charging 17.5% VAT. In early December 2008 it was agreed with the customer that some of the goods should be returned and a credit note issued to my customer for these returned goods. Should I show VAT at 15% or 17.5% on the credit note?
The rate of VAT to be used for credit notes or debit notes is the one which was in force at the time of the original supply. Your supply was in November 2008 and you charged 17.5%, so the credit note must show VAT at 17.5%.
6 HOW DO I COMPLETE MY VAT ACCOUNT / VAT RETURN?
If your VAT return period spans 1 December 2008 you will need to be able to account for standard rated sales and purchases at both the new rate of 15% and the previous rate of 17.5%. This section takes you through some of the most common situations.
I am on quarterly VAT returns and my next VAT return includes days before and days after the rate change. How can I be sure that the VAT amounts I include in my VAT account and my VAT return are correct?
The change to the VAT rate should not change the way that you prepare the VAT account and complete your VAT return. If you calculate your VAT from sales invoices, then the key is to get the new rate on those invoices for supplies made on or after 1 December 2008. If you use a retail scheme (see section 3) or one of the other accounting schemes (see section 7.), there may be additional steps you need to take.
I have issued an invoice after 1 December 2008 and I have charged my customer VAT at 17.5%. The customer has paid the invoice in full. Do I have to record the VAT amount in my records at 17.5%?
If the amount of VAT shown on a VAT invoice you have issued is higher than the amount properly due, then you must account for the higher amount in your records. You can of course correct the error with your customer by issuing your customer with a credit note (see paragraph 1.5) and adjusting the charge in your VAT account.
6.1 Fuel Scale Charges
VAT registered businesses that reclaim VAT on road fuel are required to account for VAT to reflect the private use of business vehicles. There is no change to the fuel scale charges which have applied since 1 May 2008 but the VAT on these charges will have to take account of the new rate of 15% from 1 December 2008. The new amounts applicable from 1 December 2008 can be found on the HMRC website.
6.2 Partial exemption – de minimis
If you make a mixture of exempt and taxable supplies you are required to restrict the amount of input tax you may reclaim unless the amount of restricted VAT is £625 or less per month on average and less than half of your total input VAT. The £625 limit is unaffected by the change to the standard rate.
7 SPECIAL VAT ACCOUNTING SCHEMES
This section looks at how businesses operating the following VAT accounting schemes should deal with the reduction in the standard rate.
Agricultural flat rate scheme
Annual Accounting
Cash Accounting
Flat Rate Scheme
Payment on Account Regime
7.1 Agricultural flat rate scheme
I am on the Agricultural Flat Rate Scheme. Will the change affect me?
No. Although the change will result in you paying less VAT on your standard rated purchases, you will continue to be able to charge a 4% Flat Rate Scheme addition on your sales of relevant goods to VAT registered businesses.
7.2 Annual accounting scheme
Will HMRC change my installments?
No. The precise effect of the rate change will vary from business to business and HMRC will not be changing the installments already notified.
What if I think my installments are too high?
If you disagree with the amount of your interim payments, or you expect your VAT liability to increase or decrease significantly over the course of the year you should contact the Annual Accounting Registration Unit and explain how you have calculated your interim installments. The address to contact is:
Annual Accounting Registration Unit
Imperial House
77 Victoria Street
Grimsby
Lincolnshire
DN31 1DB
7.3 Cash accounting scheme
How does the change of rate affect my cash accounting?
You must remember that the scheme allows you to account for your VAT liability when you receive payment. It does not affect the tax point. The tax point is the time that the sale is made under the law and it determines the rate of tax applicable
This means that VAT will be due at 17.5% on supplies you made before the rate change, even if you receive payment after the change. When you receive payments in the months 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% rate.
How do I separate payments for supplies at the old and new rate?
This process is similar to when you first joined the scheme and requires you to be able to trace the invoice (or at least the rate charged) for any receipt. The purpose of this is to make sure you don´t pay too much or too little VAT.
7.4 Flat rate scheme
Will the rate change affect my flat rate percentage?
Yes. The table of flat rates has been changed to reflect the new rate of VAT. The new table can be found on the HMRC website. You should make sure you use the new rate for your sector from 1 December 2008.
My flat rate has not been reduced. Why not?
The flat rate percentages are calculated by reference to the VAT actually paid in each sector and, following the change to the standard rate of VAT, most sectors will find that their flat rates are reduced. However, there are a small number of sectors that, with VAT at 17.5%, would have needed an increase in order to reflect the correct underlying rate for that sector. Following the rate change to 15%, those sectors have been left unchanged rather than increased.
I use the cash based turnover method. I have received payment for a supply made prior to the change of flat rates. Which flat rate should I use?
Remember that the cash based turnover method allows you to account for your VAT liability when you receive payment. It does not affect the tax point. Supplies made before the rate change remain taxable at 17.5%, even where payment is received after the change.
To determine your VAT liability for a particular transaction, you will first need to identify and separate all payments made and received so that you can identify the appropriate rate of VAT. You must then apply the flat rate percentage that was in place at the time of supply and not the rate that is in place when payment is received. You will probably need to refer back to the original invoices.
7.5 Payment on Account regime
Will the change affect my payments on account?
No. However, if in the next 12 months you expect your future VAT liability to decrease by 20% or more, then you can write to the POA team (address below) and request to have your payments on account reduced.
POA team
3rd Floor SE
Queens Dock
Liverpool
L74 4AA
Remember that if your annual VAT liability over a 12 month period is less than £1.6 million you may leave the regime by writing to us at the address above. You can only leave the scheme on the basis of past VAT payments, not on the basis of anticipated future payments.
Budget proposals and other tax changes are summarised in this document. The proposals may, however, be amended significantly before enactment. The content of this communication is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining liability to tax or determining investment strategy in specific circumstances. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without a thorough examination of the particular situation and before talking to your normal LB Group contact.
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