Annex A: CRM Brief -
Key messages for business
(Source: HM Revenue & Customs)
General
- Standard rate of VAT reduced from 17.5% to 15% from
1 December 2008.
- Appreciate that there is little time to make the necessary changes and you will have questions about that.
- We are here to help.
Commencement provisions - general
- The 15% rate of VAT will apply to all standard rated sales that take place after 1 December 2008.
- The normal tax point rules for determining when a sale takes place will apply. But see below for special change of rate rules.
Commencement provisions – special change of VAT rate rules (Section 88, VAT Act 1994)
- There are special rules for sales spanning the change of rate. They apply to situations where the business has received a payment or issued an invoice before
1 December 2008 for goods that will be provided or services delivered after 1 December 2008. In these cases the business can elect to account for VAT at the new rate of 15% on the amounts already received or invoiced. They don’t need to tell us or get our agreement.
- As a condition, businesses are required to issue a credit note if they have already issued a VAT invoice showing the old rate of VAT. A business that decides to operate the special rules and needs to issue a credit note has to do so within 45 days after 1 December 2008 (please note we are changing the law to extend this period to 45 days to give businesses more time).
What if businesses make mistakes implementing the change of rate (light touch)?
- HMRC wants to encourage and assist businesses as they make the changes necessary to deal with the change in the standard rate.
- If a business discovers that it has made material mistakes, it should correct them through the normal voluntary disclosure process.
- HMRC will however be operating a ‘light touch’ in terms of errors made in the first VAT return after the change (where the error relates to a change of rate issue). This means that in our audit plans we will not target change of rate errors that are unlikely to lead to any material net revenue loss. And if we find errors which relate to a change of rate issue we will not seek an adjustment unless we have reason to suppose that there is an overall revenue loss.
- For example, consider a fully taxable business which supplies standard-rated goods to a fully taxable customer and incorrectly charges 17.5% rather than 15%. As the detailed guidance makes clear, the customer should treat only 15% of the tax exclusive (net) price as input tax. However, if the supplier has accounted for the full 17.5% there will be no overall loss of tax if the customer treats the full 17.5% as input tax. When auditing the purchaser, HMRC will assume that the supplier has followed the accounting documents unless there is good reason to suppose otherwise.
- By contrast, consider a cash accounting business which makes a supply before the change in rate at 17.5% but gets paid after. Assuming that the customer has correctly paid and recovered 17.5% VAT, if the supplier only accounts for VAT at 15%, as the rate in place at the time of payment, there will have been an overall revenue loss. In this case, the supplier should have accounted for VAT at 17.5%, and if this error is discovered on auditing the supplier, HMRC will seek to adjust (issue an assessment) in the normal way.
- In situations where HMRC do need to adjust (and issue an assessment) we will take into account the difficulties the business has faced in adjusting to the change in considering whether penalties apply. The light touch applies here as well.
Anti – forestalling provisions – for when the VAT rate goes back up
- Anti-forestalling legislation will be introduced in Finance Bill 2009 to ensure that businesses are not able to use artificial arrangements to reduce the VAT rate on goods or services to be provided after a VAT rate increase where there is no current economic activity. Genuine commercial transactions should not be affected. The Financial Secretary to the Treasury, Stephen Timms, will make a written ministerial statement on Tuesday 25 November setting out the details of the types of arrangements the legislation will be designed to capture.
Questions and Answers
Q: Do retailers have to pass the VAT reduction on to their customers?
A: 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 government.
Q: What if businesses cannot implement the change in time?
A: We want to work with business to find solutions. Even if they cannot make the full and final changes to systems by
1 December 2008 we want to explore whether there are any short term measures e.g. manual work-arounds that can be put in place to enable them to implement the change as soon as possible. Businesses may need to make some temporary arrangements so that they can account for the correct amount of VAT in the first VAT return after the change.
