Saturday 10 October 2009

VAT : Change of Rate on 1 January : What to do

This change affects any VAT registered business selling or buying goods or services subject to the standard rate of VAT.


Tills and accounting systems


These  will need to be reconfigured, so that all invoices issued on or after 1 January 2010 use the new rate of VAT unless the supply was made more than 14 days beforehand, or payment was made before 1 January 2010. HMRC will allow an "easement" for businesses (such as pubs and nightclubs) which will be open overnight on 31 December/1 January and have announced that they will be able to continue to use  the 15% rate until the earlier of their closing on 1 January 2010 or 06:00 on that day.


HMRC say their officers will adopt a "light touch" approach to errors made relating to the VAT rate change in the first VAT return made after the change. This means that only errors that result in an overall loss of revenue to HMRC must be repaid, and penalties may not be imposed.


General rules


Generally where there is a change in the VAT rate or a VAT liability, VAT is chargeable according to the normal tax point rules. VAT should be charged at the rate of 17.5% on any sales of standard-rated goods or services made on or after 1 January 2010, unless the business decides to elect to use the special change of rate provisions.


Special change of rate provisions


Where a VAT period spans a change in the tax rate or liability, traders may choose to account for tax at the old rate on the part of the supply made before the change, even though the tax point will occur after the change - for example, where a payment is received after the supply.


Conversely, traders may choose to account for tax at the new rate on the part of the supply made after the change, even though the normal tax point would have occurred earlier (for example, where a payment is received in advance of the supply).


The trader must account for tax on the basis of the value of the goods actually supplied or services actually performed, before or after the change, as appropriate. If this reduces the liability to VAT for a supply for which a VAT invoice has already been issued at a higher rate, the trader must issue a credit note.


Traders can elect to use these rules for all affected supplies or only some of them, but an election cannot be made where:

  • VAT invoices are issued under a self-billing arrangement, or
  • when goods are sold from the assets of a business in satisfaction of a debt.



The effect of the election is that, where the VAT rate goes down, VAT may be charged at the new rate on goods removed or services performed after the date of change, even though payment has been received or a VAT invoice was issued before that date.


Supplies of services


VAT can be charged at the old rate on the part of the service completed before the date of the change in the VAT rate, and at the new rate on the part completed on or after that date. This applies as long as the supply can be apportioned, for example on the basis of measured work, or in accordance with the supplier's normal costing or pricing systems. Where VAT is reduced and a VAT invoice was issued or payment was received before the date of VAT change, a credit note must be provided to the customer.




Continuous supplies of goods and services


For continuous supplies of goods or services VAT is normally chargeable at the rate applying at each tax point.


If a VAT invoice is issued in advance, giving the amounts and dates when payments are due, it will be invalid in respect of payments due after the rate change (and where payments were not received before it). A new invoice, referring to and cancelling the invalid parts of the original invoice, must be issued. Customers cannot use the original invoice to claim input tax after the change, and they must make adjustments to input tax where necessary on receipt of the new invoice.


Where a continuous supply spans a change in the VAT rate, the supplier can elect to use the special rules outlined above.


Hire purchase, conditional and credit sales


Under hire purchase, conditional and credit sales agreements, there is a single supply of goods and the normal tax point is the earliest of:

  • the date of issue of the agreement (provided that the agreement is in the form of a VAT invoice); and
  • the date of the issue of a separate VAT invoice.



On a change in the VAT rate, the tax point will be whichever of the above results in the lower rate of VAT being charged.


Deposits and payments in advance


Where full or part payment is made, or a VAT invoice issued, before the basic tax point, VAT will normally be due on the amount paid or invoiced at the rate in force at that date.


If there is a change in the VAT rate before the supply is actually made, VAT may be charged at the rate applicable when the supply is made and a credit note issued to amend the VAT invoice.


These rules do not apply to security deposits (e.g. to ensure the safe return of hired goods) refundable or subject to forfeiture or if the deposit does not relate to a particular supply or contract (e.g. money paid into a client's account).


Credits and contingent discounts


Where a credit note (not arising from the change in rate) is issued to adjust an original invoice, VAT should be credited at the rate in force at the tax point of the original supply.


Where contingent discount is allowed and the original VAT charge is adjusted, VAT should be credited at the rate in force at the time of each supply qualifying for the discount.


Facilities provided by clubs, associations, etc


Clubs, associations, etc supplying facilities in return for a member's subscription must normally account for VAT at the rate applying when the subscription is received or a VAT invoice is issued, whichever happens first. Where payment is made by instalments or separate invoices are issued, the procedure for continuous supply of services should be followed.


HMRC have now published a comprehensive 45 page guidance document dealing with the rate change which can be viewed here.


This article was revised on 7 November 2009.



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