Temporary VAT Reduction Guidance

Whilst the headline grabbing temporary 2.5% reduction in the standard rate of VAT announced in the Pre-Budget Report will help many businesses, it is also likely to create a number of issues particularly around the transitional period. This briefing aims to provide practical tips on how to address the issues, manage the transition and clarify what VAT can be recovered.

A few short points

Customs have admitted that they completely underestimated the time and expense that businesses would have to devote to the change. However delaying was not an option; the Chancellor has spoken and nothing major is negotiable.

Entities including those in the Not-for-Profit sector that receive annual subscriptions can adjust the VAT already charged on the unexpired portion. However the law requires you to refund the subscriber. Customs by concession say that they will let you set up a creditor to the subscriber and deduct it from the next subscription. As it is likely to amount to so little many will not bother. A £200 subscription with 6 months to run under the new rate will generate a refund of roughly £2.

Many retailers will not get their tills adjusted by 1st December 2008 so that if you buy small items from them your till receipt may show 17.5%. However in your input tax claim you must identify that it was purchased after 1st December 2008 and recover only 15% input tax.

HMRC have a policy of a light touch in respect of the changes. However it is only for your current VAT period and if that happens to be expiring on 31st December 2008 they say that is just bad luck. A light touch means that they will not worry about errors between fully taxable businesses.

Overview

The reduction in the standard rate of VAT from 17.5% to 15% is intended to cover standard rated supplies made between 1st December 2008 and 31st December 2009. Legislation will be introduced in the 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 the VAT rate reverts to 17.5% or a rate that may be higher than 17.5%. This anti avoidance legislation will have effect for arrangements entered into on or after 25th November 2008.

The new rate of 15% will apply to supplies made on or after 18th November 2008 provided payment is received and the VAT invoice issued on or after 1st December 2008. If a payment has been received or an invoice issued using the old 17.5% rate before 1st December 2008, for goods or services which will be provided on or after that date, businesses can choose to leave the VAT charged at 17.5% or to account for VAT at the new rate of 15% and refund the difference to the customer.

The 18th November 2008 date is derived from the ability to issue an invoice within 14 days of the normal supply date. Many businesses especially large ones have an agreement that the limit is 30 days. It is expected that HMRC will issue a statement confirming that such businesses can retain the 30 day limit for evaluating supplies that straddle the rate change.

Delivery of goods and part payment

If you delivered goods before 18th November 2008 but have not issued an invoice, you cannot now issue an invoice with the new rate of 15%. This is because a tax point in respect of goods is 14 days after delivery/supply, even if the invoice has not been raised. Also if payment for goods, in whole or in part is received before 1st December 2008, then the old rate of VAT applies to that payment.

Continuous supplies of services

For continuous supplies of services e.g. tax consultancy, payments received, or invoices issued on or after 1st December 2008 will be subject to 15 per cent VAT. However you may also be able to reduce to 15% the VAT on a payment received before 1st December 2008 for work performed after the rate change: see chart.

Pre Invoiced Supplies

Often products or services are billed before the supply. For example, if a wardrobe is delivered after 1st December 2008 but paid a few days in advance then you can alter the VAT charge to 15% and make the appropriate refund.

Credit Notes in respect of incorrect rates of VAT

The usual rules for credit notes are relaxed and you have 45 days to issue a credit note in respect of supplies that straddle the rate change. See the example on the right in respect of lease rental payments.

Flat Rate Scheme

If you use the flat rate scheme you should check the HMRC website to obtain a new percentage.

Property Leases

In respect of rent on which VAT is charged - If a VAT invoice has already been issued or rent paid in advance in relation to a period that spans 1st December 2008 the VAT can be recalculated so that the tenant gets the benefit of the 15% rate in relation to the letting from 1st December 2008. A landlord who chooses to do this must issue a credit note within 45 days of 1st December 2008. There will be no point in doing this for a tenant with a fully VAT-recoverable status.

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