As you will be aware the Chancellor announced in his pre-Budget Report on 24 November that the standard rate of VAT would be reduced to 15% on 1 December 2008
We detail below a number of tips on its introduction, as well as answering a range of questions that you may have.
- What do I have to do?
- Which of my sales are affected?
- If you are a retail business making mainly cash sales to customers not registered for VAT (e.g. a shop, restaurant, takeaway, hairdresser)
- If you are a business that sells mainly to other VAT-registered businesses and have to issue VAT invoices
- Are there any special rules for sales spanning the change of rate?
- What about continuous supplies of services e.g. work in progress?
- What if I use a computer, VAT software?
- What if I use an electronic till?
- Do I have to pass on the rate reduction?
- What about the VAT I claim back on my business purchases?
- 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?
- 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?
- 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?
- 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?
- What if the less detailed invoice shows the VAT rate as 17.5% on goods I purchased after the rate change?
- What if my VAT return covers the change of rate and some less detailed invoices are at the old rate?
- 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?
- I receive imported services that are subject to the reverse charge provisions. What rate of VAT do I use?
- What do I do about my VAT return?
- What if I make an error associated with this change?
- What about the Cash Accounting And Annual Accounting schemes for small businesses?
- What about the Flat Rate schemes for small businesses?
For any sales of standard-rated goods or services that take place on or after 1 December 2008 you should charge VAT at the new rate of 15%. This means that cash businesses which currently calculate their VAT using the VAT fraction of 7/47 should, from 1 December, use the new VAT fraction of 3/23.
Only standard-rated sales are affected. There are no changes to sales that are zero-rated or reduced-rated for VAT. Similarly, there are no changes to the VAT exemptions. Any sales you make at these rates are unaffected.
For your standard-rated sales, it depends how you normally account for VAT:
If you are a retail business making mainly cash sales to customers not registered for VAT (e.g. a shop, restaurant, takeaway, hairdresser)
You should use the new rate for all takings that you receive on or after 1 December 2008 except for where your customer pays for something they took away (or you delivered) before 1 December (e.g. where customers have an account with you).
In this case, your sale took place before 1 December and you must use the old rate of 17.5%.
If you are a business that sells mainly to other VAT-registered businesses and have to issue VAT invoices
You should use the new rate for all VAT invoices that you issue on or after 1 December 2008 except for where
- you provided goods or services more than 14 days before you issue 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 took place before 1 December and you must use the old rate of 17.5%.
Yes. If you have received a payment or issued an invoice using the old 17.5% rate before 1 December 2008 for goods that will be provided (or services delivered) after 1 December 2008, you have a choice.
You can choose either to leave the VAT charged to your customers at 17.5% and account for that to HMRC, or to account for VAT at the new rate of 15% on the amounts already received or invoiced. You don’t need to tell HMRC if you do this. But you do need to issue a credit note, and refund the difference in VAT to your customer if you have already issued a VAT invoice showing the old rate of VAT. If you haven’t issued a VAT invoice, you can account to HMRC for the 15%, and would normally be expected to refund the difference to your customer.
For continuous supplies of services, such as ongoing construction work, you should account for the VAT due whenever you issue a VAT invoice or receive payment, whichever is the earlier. In these cases, invoices issued or payments received on or after 1 December will be subject to 15% VAT.
If you have a software package that automatically calculates the VAT, you will need to ensure that the VAT rate is changed from 17.5% to 15% for sales falling within the new rate. This may be something that you can do yourself – otherwise you will need to contact your software provider or supplier for assistance.
We have listed below the software setting change for Sage Software. If you use other software then you may need to contact the software helpline:
1. Open the Settings menu, choose Configuration then click the Tax Codes tab. If using Sage Accounts Version 9 and below you need to Open the Settings menu then choose Tax Codes. The tax code information appears.
2. Select T1 then click Edit. Note: If you use a different tax code for your standard rate of VAT, select the relevant tax code then click Edit. The Edit Tax Code window appears.
3. Enter 15 in the Rate box then click OK. The Edit Tax Codes window closes.
4. To apply the change, and return to the Sage Accounts desktop, click Apply then click Close. Tip: If you are prompted to save your changes, click No. Sage Instant Accounts version 14 – Click Save then click Close.
You have successfully changed the standard rate of VAT.
You may be able to adjust your electronic till yourself but if not you will need to contact your till supplier for assistance. If your till has not been amended to calculate 15% (rather than 17.5%) by 1 December you will need to calculate the VAT manually. You simply take the standard-rated gross takings calculated by your till and multiply that sum by the new VAT fraction of 3/23 – this will give you the amount of 15% VAT.
The Government is looking to businesses to pass on the benefit to consumers, and has encouraged them to do so. Ultimately, however, decisions on prices, charged by businesses and paid by consumers, are for businesses rather than the Government.
The general rule is that you claim back the VAT you have been charged by your supplier in the normal way.
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%.
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.
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.
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.
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.
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
You will continue to receive or file VAT returns in the normal way i.e. either 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 December 2008, you will need to add together the VAT on sales charged at 17.5% and the VAT on sales charged at 15% to work out the total VAT on sales to be included in Box 1 of 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).
HMRC recognises that this is a change that businesses will have to implement in a short timescale. Therefore they have announced that they will adopt a “light touch” in relation to errors or mistakes made in the first VAT return after the change. They have stated they will take into account the difficulties a business has faced in adjusting to the change.
The Cash Accounting and Annual Accounting Schemes remain unchanged.
The Flat Rate Scheme percentages are changing to reflect the new rate of VAT. If you are on the Flat Rate Scheme the new rates from 1 December 2008 are as follows:
Category of business
Accountancy or book-keeping
Any other activity not listed elsewhere
Architect, civil and structural engineer or surveyor
Boarding or care of animals
Business services that are not listed elsewhere
Catering services including restaurants and takeaways
Computer and IT consultancy or data processing
Computer repair services
Dealing in waste or scrap
Entertainment or journalism
Estate agency or property management services
Farming or agriculture that is not listed elsewhere
Film, radio, television or video production
Forestry or fishing
General building or construction services*
Hairdressing or other beauty treatment services
Hiring or renting goods
Hotel or accommodation
Investigation or security
Labour-only building or construction services*
Laundry or dry-cleaning services
Lawyer or legal services
Library, archive, museum or other cultural activity
Manufacturing that is not listed elsewhere
Manufacturing fabricated metal products
Manufacturing yarn, textiles or clothing
Mining or quarrying
Real estate activity not listed elsewhere
Repairing personal or household goods
Retailing food, confectionary, tobacco, newspapers or children’s clothing
Retailing pharmaceuticals, medical goods, cosmetics or toiletries
Retailing that is not listed elsewhere
Retailing vehicles or fuel
Sport or recreation
Transport or storage, including couriers, freight, removals and taxis
Wholesaling agricultural products
Wholesaling that is not listed elsewhere
“Labour-only building or construction services” means building or construction services where the value of materials supplied is less than 10 per cent of relevant turnover from such services; any other building or construction services are “general building or construction services”
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