Are you prepared for the VAT rate change on 1 December 2008?

As previously heralded, the standard rate of VAT will decrease for 13 months with effect from 1 December 2008. The new headline rate will be 15%.

The period between now and 1 December will allow businesses to restructure their VAT affairs to reflect the change.

So what should you look out for?

Deposits

An advance payment for goods and services to be sold or performed at a future date crystallises a point for VAT purposes when VAT must be charged and accounted for. If the deposit is pre 1 December VAT at 17.5% should have been brought to account. However if the goods are sold or services performed post 1 December 2008 then VAT can be charged at the new 15% rate. A credit note can be issued to correct the original VAT charge.

Example

• A deposit of 10% is paid for goods on 25 November 2008. This equates to £200. VAT at 17.5% must be paid and if we are dealing with VAT inclusive payments VAT of £29.78 is accountable. However the goods are not delivered until after 30 November 2008 and therefore VAT is only accountable on the balance of £1800 inclusive at the new rate. This works out at £234.78 VAT.

You are able to account for VAT at 15% inclusive on the original supply of £200 with the new VAT payable on this amount being £26.08 (a difference of £3.70). Please note that the change must be notified to the consumer.

Continuous supplies of services

Where services are supplied on a continuous basis e.g. services provided by legal and accountancy businesses, the date that VAT becomes chargeable is the date of invoice or payment if this is an earlier date.

Example

• XYZ LLP has work in progress for October and November 2008 and the service is due to end on or after 1 December 2008.
• If XYZ bills at the end of November VAT at 17.5% becomes chargeable. If it bills on or after 1 December VAT at 15% becomes chargeable.

Planning point

It might more be prudent to wait, if you can, and raise invoices dated 1 December. However I am sure there will be Finance Directors that may not agree with this approach!

Credit notes

Where an invoice has already been issued showing VAT at the old rate, it must be corrected with a credit note issued within 45 days of the change.

And finally...

These changes are most relevant where your customer cannot recover VAT on the supply you make to them. For those supplying services to the VAT Exempt sector e.g. the financial sector or charities, your customers are likely to have issues that will be raised with you.

And of course there is the small issue of having to change your software to reflect the changes - and all within a week. 

Good luck! Our VAT team is here to assist you.

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