HMRC has issued a range of guidance for businesses and consumers, together with a range of FAQ’s on the change in rate. The guidance includes a simple guide for businesses [1] and a more detailed technical guide [2], which advisers may find helpful. HMRC posted letters to all VAT registered businesses on Monday 24 November to explain the changes – the text of which largely follows the business related FAQ’s [3].

In view of the comprehensive advice already produced, this article will not provide specific and detailed information, but more of a “How to do this” for your clients (and you!).

First – check out the taxpoint rules

The taxpoint rules determine when a supply is made for VAT purposes. These are described in some detail in the related article VAT rate change – taxpoint [4].

The taxpoint rules allow a supplier to 'date' a transaction for VAT purposes. This is particularly important when the trader uses cash accounting to determine when the VAT output tax is paid, as he will be less used to determining taxpoint under the conventional rules.

There are some transactions which make determining taxpoint particularly challenging and also some special rules applying to certain business sectors. It is wise to review Section 10 of the technical guide for businesses [5] to see whether any of the special rules apply to your business or your clients.

Generally speaking the new standard rate of 15% will apply to all supplies made on or after the date of change – 1 December 2008. Using taxpoint to determine the date of the supply allows the trader to perform an accurate cut-off between supplies liable to 17.5% and those liable to 15%.

When businesses account for VAT under the Flat Rate Scheme they will still need to determine the taxpoint applying to the supply to determine the correct flat rate to apply to the supply. This may not be the rate applicable when the cash is received. Note that the new flat rates (effective 1 December 2008) are set out in Annex E to the technical guidance on the change.

Second – optional rules relating to the reduction in rate

Normally the taxpoint rules determine the rate of VAT applying to the supply, and the operation of the rules means that supplies made on or after 1 December 2008 but in respect of which payment was made before that date, or a VAT invoice was issued before that date, will be taxed at 17.5%.

The special (optional) rules allow the trader to charge VAT at the new rate on the supply when the actual supply was made after the change in rate. So an invoice issued on 15 November in respect of a supply that was actually made on 5 December could be amended to reflect VAT at the new rate of 15%.

It is open to the trader to decide whether this is what he wishes to do – it will mean that he will need to issue a credit note in respect of the VAT reduction as against the original invoice. This may be useful when the receipt of a deposit splits a supply across the date of change, so that the invoice (when subsequently issued) can show a single rate of VAT rather than splitting the supply into two rates, but it is difficult to see how traders who have already invoiced the full supply in advance will benefit from reducing the rate of VAT in retrospect, particularly as it will result in the requirement to issue credit notes.

Third – special situations

There is a wide range of special situations dealt with in the HMRC guidance, but supplies by firms of accountants are worth commenting on in detail. In broad terms, most accountants make continuous supplies of services (see section 10.2 of the guidance) to their clients, and thus should account for VAT at the earlier event of:

• Issue of a VAT invoice, and
  
• Receipt of payment.

Generally speaking, therefore, firms issuing a single annual invoice to cover the services supplied during the previous year will charge VAT at the rate applying on the date the invoice is raised, and this will be the correct rate for change in rate purposes.

The special change of rate (optional) rules can apply to this situation, so that the rate of VAT charged may be determined by the date the actual supply was made. This would be helpful if the supply is paid for earlier than the date the supply is made (or the invoice is issued). Where clients have yet to submit records for the 2008 tax return, the supply could then be fully taxed at 15%, even if part payment has already been made.

It is also open to firms to issue a VAT invoice (as opposed to a request for payment) showing periodic amounts due under the agreement. This annual invoice should show monthly payments due and the VAT in relation to each payment, and should be issued no more than 12 months before the supply is actually made. An annual fee note showing payments due and VAT applying to them will be sufficient. The taxpoint in relation to an annual invoice that meets these requirements is the date that payment is received, and in relation to input tax recovery, the client must not recover VAT until the payments are made.

Such an invoice is no longer valid after the change in rate, and must not be used as evidence of VAT paid by the client. Firms will need to issue a replacement invoice for all payments made after the date of change, which must state that it cancels the supplies invoiced earlier, and refer to the invoice which it replaces. This is not an optional treatment and must be adopted by businesses making continuous supplies and invoicing up to a year in advance. The other common supply affected by this rule is that of leasing business equipment such as photocopiers.

Fourth – input tax claims

The tax point for a supply is determined by the supplier. So the recovery of input tax should be simple, and will follow the rules set out above in relation to the output tax. In simple terms, the purchaser should recover the VAT shown on the tax invoice and no other amount.

However, where the taxpoint for a supply is after the date of change and the supplier incorrectly charges 17.5%, the purchaser can still only recover 15% – the VAT he should have been charged. The purchaser will need to ask the supplier for a credit note for the incorrectly charged VAT. Purchasers will also need to be aware of the special rules described above and be prepared to process VAT credit notes where appropriate.

Where a less detailed tax invoice is issued in respect of the supply, the VAT is not separately identified, but the rate charged should be quoted, so the VAT can be calculated from the gross amount. Similar comments apply as above.

Finally – software

HMRC has already discussed this issue with software providers so they should be ready to provide support as necessary. In essence the business will need to create additional VAT codes to show VAT at 15% rather than 17.5%. Depending on the type of software that is in use, it may be preferable to create a new VAT type of standard rate at 15% rather than changing the existing rate to 15, as there may be some residual supplies at 17.5% for a while, and of course don’t forget that we are due to reverse all of this in 13 months time!!

***

Pre-budget report 2008 coverage sponsored by

[6]