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PBR 2008: Change in the rate of VAT – A how to do it guide

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25th Nov 2008
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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 and a more detailed technical guide, 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.

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.

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 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!!

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Replies (18)

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By User deleted
03rd Dec 2008 18:29

Cash accounting problem
"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."

There would be no correlation if the clients use cash accounting for VAT and reclaim the VAT at 17.5% on payments made before 1 December, but we raise the annual invoice after 1 December, maybe not till the middle of next year with VAT at 15%.


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Rebecca Benneyworth profile image
By Rebecca Benneyworth
03rd Dec 2008 21:53

Be careful Sue
If you are receiving periodic payments, these create the taxpoint and not the invoice. So any payments received prior to 1 December 2008 have a taxpoint at the old rate of VAT (for both parties). So raising an invoice mid 2009 won't be correct if this is done at 15%.

I was referring to an annual invoice at the end of the annual cycle of work which is then paid in full shortly afterwards (with luck!)

When the client is making payments during the year strictly no VAT is recoverable until an invoice is supplied (as there is no VAT receipt).

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By anne.globe
04th Dec 2008 10:43

what about deferred invoices?
What about when the service was supplied 6 months ago but the agreement is to invoice 60% at the time of supply and 40% 6 months later? Is the second invoice at 17.5 % because the supply of the service was more than 14 days before 1st December (as per the HMRC VAT factsheet)?

Any comments welcome!

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By TC1
02nd Dec 2008 13:31

VAT reduction: NOT a 2.5% price reduction
Nichola Ross Martin in her newsletter quotes the common and understandable misapprehansion that a 2.5% reduction in the VAT rate is also a 2.5% reduction in consumer prices. It isn't - the gross price only comes down by 2.1%. For the arithmetically-minded, that's (1175-1150)/1175x100.

Does it matter? Well, if a retailer rushes round and reduces all their (inc. VAT) prices by 2.5%, they're going to be out of pocket. I'm making sure that all my clients understand this.

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By TC1
02nd Dec 2008 13:21

Don't try HMRC's Guides?
The 2 HMRC guides that Rebecca recommends look very helpful - until you realise that they disagree with each other on transactions that span 1 December.

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
01st Dec 2008 13:52

Try HMRC's guide
I think you can do no worse than the simple guide mailed out to businesses which is here : http://www.hmrc.gov.uk/pbr2008/vat-guide-sum.pdf. The charts at the bottom of page 2 and top of page 3 are very clear. If you make supplies across 1 December use the follow up which is here http://www.hmrc.gov.uk/pbr2008/treatment-sales.pdf and includes four simple charts.

The problem with VAT is that there are so many possible scenarios that it is so tricky to generalise!

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By jairorojas
27th Nov 2008 18:20

Should we applaud HMRC?
All software developers should have enough between their ears to work through the implications which are quite clearly laid out in the HMRC technical guide. The documentation from HMRC should be applauded.
Now, in this article you state “Finally – software … HMRC has already discussed this issue with software providers so they should be ready to provide support as necessary”
This could do with some correction as HMRC did not provide any info or consultation prior to the change.
And last but not least, we join forces with Kim Etherton and Mark Lee in criticising the Impact Report produced by the treasury. I would like to think they took it out of a cupboard where it had been for over 15 years when accountants and consulting rates where at those levels. I had a few conversations at our local cafe, and a particularly resounding one was that of a small business with a turnover of less than £250K a year who had to pay £500 to a consultant to re-arrange his software to cope with the change. I don't think he is alone. It is difficult to understand the motivation behind anyone who wants to endorse or sign the information provided in it.
Basda members have quickly rally to understand the impact of VAT changes to our developers and their customers, but it would be difficult to rationalise it in a few paragraphs. Some recommendation/warnings have been put on our web page, but a lot of the work is being carried out internally between the members of the different s special interest groups.

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By john.sage-assist.com
28th Nov 2008 15:18

Tax Point/Rate Flow Chart
Has anybody come up with a flow chart to save all this head scratching when determining which rate to use.

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By Bosctax
27th Nov 2008 08:05

Who really benefits?
As previous contributors here have already said, it is not the man in the street who will notice any worthwhile improvement. Surely the VAT reduction is aimed at the big VAT-exempt organisations, the banks, insurance companies and similar financial institutions, who will save millions in their vatable overheads. Ironic, what?

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By rondomtis
26th Nov 2008 15:47

Variable VAT rates
Of course, some software allows you to change the rate associated with a VAT code on a date basis, and in this case you simply need to set the new rate an effective date and all should be well.

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By jimeth
26th Nov 2008 15:38

Impact Assessment is Laughable
Looking at the government's Impact Assessment one really does wonder whether they live in the real world.

The number of hours allowed for both small and large businesses is ridiculously small. And then this is converted to monetary value at a rate of £12.50 per hour!

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By PPritchard
26th Nov 2008 13:53

Will this really benefit the economy?
Hi Everyone,

I can't help thinking that, while a VAT reduction sounds good, it is only for 13 months. So what will happen by this time next year with consumer spending habits?

My theory is that people will have a "spending spree" at the end of next year. They will do this to take advantage of last minute "bargains" before the rate changes back to 17.5%.

And how will people finance these last minute purchases? With credit cards! So this will increase the amount of debt that consumers have - many of whom can't really afford to do this.

Surely, this is not going to help the economy if people find themselves in a worse financial situation through overspending!

In the meantime, as has already been commented on elsewhere, the average family spend at, say, the local supermarket, is not going to be that much different due to the amount of zero rated / exempt items purchased.

So where are the savings for the average UK citizen?

If people are not careful, they could easily find themselves worse off in 2010 than they would otherwise have been if VAT remained the same. It was commented yesterday that CIOT estimates a family with an annual income of £20,000 or less will be £2.50 per week better off. Over 13 months this equates to approximately £140.00.

How much interest would the same family pay to a credit card company if they overspend before the rate goes back up? A lot more than £140, I would imagine...

Anyway, I'm glad to have got these issues of my chest! I can now go back to answering the incessant phone calls I'm receiving from harrassed clients about this rate change...

I look forward to reading other members comments on this.

Paul Pritchard

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By paulwakefield1
26th Nov 2008 13:47

Light touch
"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."

HMRC then seem to relax this strict interpretation in their "light touch" section on page 33.

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By vkmida
26th Nov 2008 13:17

Optional VAT reduction
Do not forget that some accountants still work in retail and therefore have a heart.

You question how traders will benefit from issuing credit notes for the VAT reduction which is at their option.

To their customers, this is a massive goodwill gesture which saves a bit of money that was not expected but does not directly cost the trader.

When did the banks last pass on immediate rate savings!

Retailers who don't will look like misers before Christmas.

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By mikewhit
26th Nov 2008 08:53

Foreseeing the foreseeable
It's a shame that until now, there appeared to be no provision at least in the online HMRC docs, for a change in VAT rate, and hence advice on how to effect the transition, and hence having this built in to existing s/w packages.

We have seen changes in the VAT rate(s) in the past, so you would think that they would document the 'approved' way of managing and accounting for a changeover in rate.

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By loz
26th Nov 2008 08:41

Accountancy Firms
According to Rebecca's article above, if we supply continuous services the tax point is the earlier of the date of payment and the tax invoice date. We issue fee notes and then send out tax invoices when we receive payment. It would appear then that all our outstanding debtors at 30th November will decrease by the VAT rate difference, as when we get paid, say next week, the tax invoice will need to show 15%? If that is correct we need to send amended statements out at the weekend - if clients pay at the 'old' rate we will need to refund the difference or leave a credit on their account .... is that right?

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By rubrik
25th Nov 2008 17:06

Do politicians live in the real world
In common with most of the commentators in the media and on Accountingweb I am totally amazed that the Government believes that a reduction in the VAT rate by 2.5% is going to give any real impetus to the economy. It would seem that the Chancellor and his, no doubt extremely well paid advisors, have no concept at all about the practicalities involved or, indeed, the costs that will be incurred by businesses across the country. Mark’s comments about the impact assessment only serve to underline how out of touch the Government is with the real world and real businesses.
Not a new situation as this lack of comprehension can be seen in virtually every budget in the last ten years.
Whilst we accountants (whilst I am still allowed to include myself under that title as a CTA) earn a living dealing with the complexities, stupidities and unfairness of our current tax system I do think it is about time we stood up and said ‘enough is enough’. The whole system is flawed and it should be possible to put together a package of radical change to the process of assessing tax that is both simple, fair and understandable to the vast majority of taxpayers whilst maintaining revenue collection and blocking the worst abuses.
The various Institutes do not appear to want to take a lead and the big accountancy firms have their own vested interests so I think it would be a great idea if contributors/members of accountingweb could lead the way by having a forum where new ideas on all the direct taxes could be discussed and from there disseminated to politicians.

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Mark Lee headshot 2023
By Mark Lee
25th Nov 2008 16:26

What about the cost of the changeover?
great summary Rebecca.

Even with this simple guide I don't see the changeover being that quick or easy for small businesses. Did you know that the Government's 'Impact Assessment' calculates an average implementation cost per small business of under £100?

The 'Impact Assessment' assumes that the changeover will typically involve costs as follows:

Familiarisation time £7
Repricing £25
Extra bookkeeping checks £13
Extra accountancy costs £25
System changes/upgrades £13
plus the cost of purchasing upgrades to accounts packages (unless provided free by software providers) so assume £10

(They have anticipated higher costs for big businesses - although nothing like high enough I would imagine).

The document finishes by stating that as the government doesn't consult on rate changes they have had to rely on best assumptions and that they are always looking to improve their compliance cost assessments and are interested in feedback. Hmmm.

This one proves, perhaps better than any that preceded it, just how out of touch are the policy wonks who write this nonsense. And the ministers who sign them off are not much better. On this occasion the front page statement is signed by Stephen Timms. It states:

I have read the impact assessment and I am satisfied that (a) it represents a fair and reasonable view of the expected costs, benefits and impact of the policy and that (b) the benefits justify the costs.

Or am I being too pessimistic?

Mark Lee
Tax Advice Network

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