VAT Rate Reduction to 15% - How does it affect your business?

THE BACKGROUND

As the British Government reported on 24 November 2008, the standard rate of UK Value Added Tax (VAT) will be temporarily reduced from 17.5% to 15% between 1 December 2008 and 31 December 2009.

How will this affect different types of business?

1. INTERNATIONAL TRADERS (IN GOODS)

1.1 Exporting goods from the EC is zero-rated, so this will not be affected.

1.2 Importing goods from outside the EC into the UK will be affected, as Import VAT will now be 15%. However, most traders in goods can recover all the UK Import VAT on the grounds that it is attributable to a taxable supply of goods.

1.3 Dispatching goods from the UK to business customers registered for VAT overseas will remain zero-rated, so this will not be affected.

1.4 Acquiring goods into the UK from business customers registered for VAT overseas will be affected, as UK Acquisition VAT will now be 15%. However, most traders in goods can recover all the UK Acquisition VAT on the grounds that it is attributable to a taxable supply of goods.

1.5 Triangulated transactions are outside the scope of UK VAT, so this will not be affected.

1.6 Margin Scheme transactions (e.g. in artworks) might be affected. Where the Margin Scheme is applied to a transaction, this makes the supplier a “UK Trader”: see 3. below.

2. INTERNATIONAL TRADERS (IN SERVICES)

2.1 Services supplied outside the EC are outside the scope of UK VAT, so these will not be affected.

2.2 Services supplied under the “Reverse Charge” mechanism (e.g. consultancy services) to business customers overseas are zero-rated, so these will not be affected.

2.3 Services purchased from abroad under the “Reverse Charge” mechanism will be affected, as UK VAT on the deemed self-supply will now be 15%. However, only those purchasers who make “VAT exempt” supplies might benefit; others can recover all the deemed UK VAT on the grounds that it is attributable to taxable supplies.

3. UK TRADERS (SELLING TO UK CUSTOMERS)

3.1 Business-to-business supplies will mostly see no benefits, since most business customers can recover all the VAT charged to them (but see 3.4 below). Such suppliers will have to adjust their VAT charges from 17.5% to 15% on 1 December 2008. If errors are made in the VAT rate used, see 5. below.

3.2 Small UK traders should note that the Flat Rate Scheme percentages have been adjusted by HMRC. Please contact us if you need details.

3.3 For businesses that use a VAT fraction, including businesses using a Margin Scheme for artworks, etc., please note that the fraction has reduced from 7/47 to 3/23 (i.e. from 17.5%/117.5% to 15%/115%).

3.4 Those customers who cannot recover the VAT charged to them (e.g. private individuals such as retail customers, or VAT exempt traders such as banks/insurers) will see the main benefits. These customers will want as many as possible of their purchases to be invoiced at 15%, as VAT is part of their costs.

3.5 For businesses making supplies to the customers in 3.4 above, there will have to be changes in the systems that record the VAT on supplies, with HMRC suggesting manual amendments where the systems cannot be adapted in time.

3.6 For such suppliers, there will also have to be a close examination of Tax Points (i.e. when a supply is deemed to have been made for VAT purposes). Although anti-avoidance legislation will prevent abuse of the temporary 15% VAT rate, HMRC has already stated that some special schemes will be permitted: see 4. below.

4. TAX POINT ISSUES & SPECIAL SCHEMES

4.1 The Tax Point is the date on which a supply is deemed to have taken place for VAT purposes. The Tax Point is the earlier of payment or delivery (goods)/performance (services). However, if the invoice date is within 14 days of this, or if the invoice date is earlier than this, then the invoice date is the Tax Point.

4.2 Suppliers who make a supply (of goods or services) in the pre-15%-period, but deliver the goods or perform the services during the 15%-period, would usually still have to charge VAT at 17.5%. But now HMRC will permit the sale to be supplied at the 15% VAT rate. This is optional and is the supplier’s choice.

4.3 Supplies invoiced and delivered/performed during the pre-15% period will remain charged to VAT at 17.5%; but pre-15%-period deposits can be re-invoiced at the 15% VAT rate (see 5. below).

4.4 Continuous supplies (e.g. a year-long contract for marketing services) paid for during the pre-15%-period, but continuing into the 15%-period, would usually still have been charged to VAT at 17.5%. But now HMRC will permit the supplier to charge only 15% VAT on the supplies made during the 15%-period (though supplies made pre-15%-period will remain charged to VAT at 17.5%). This is optional and is the supplier’s choice.

4.5 Continuous supplies invoiced in advance during the pre-15%-period, but giving some payment due dates during the 15%-period, must be amended for the lower VAT rate on any payments due during the 15%-period.

4.6 Businesses using the Cash Accounting Scheme should also be careful to identify the correct Tax Point. For example, if the funds received/paid in the 15%-period relate to a transaction with a Tax Point in the pre-15%-period, then the VAT to calculate is 17.5% (7/47) rather than 15% (3/23).

4.7 Suppliers issuing a sales invoice in the 15%-period for a supply whose Tax Point is still in the pre-15%-period (even after considering the above schemes) must charge VAT charge at 17.5%.

5. AMENDING ERRORS

5.1 For all adjustments to the VAT charged on a supply as a result of the temporary change in VAT rate, HMRC has stated that a credit note is to be issued for the VAT difference (e.g. 2.5% of the net value). Such credit notes must be issued within 45 days of 1 December 2008 (i.e. by 14 January 2009).

5.2 HMRC has stated that they will regulate the change “with a light touch”, in the event they find errors in a business’ VAT records connected with the temporary change in VAT rates. But HMRC has stated that it will still assess for any lost VAT.

CONCLUSION

Although there are some flexibilities, there will be a significant administrative cost to making the changes necessary to cope with the temporary reduction for most businesses. In particular, great care is needed in identifying the Tax Point of supplies where these might have occurred in either November or December 2008.

If you need assistance or clarification for any of these issues, please do not hesitate to contact Kevin Hall at Intrust Ltd: Kevin.Hall@intrust.co.uk.

2008 © Kevin Hall of Intrust Ltd,