VAT rate change: A practical guide

HMRC has now provided a complete guide to the rate change for tax agents, on their Tax agent and adviser pages. Click the link at the top of the page, and you will find all that you need from the navigator at the left hand side. However, while this provides excellent technical guidance (and the detailed techinal guidance is here in full) on all aspects of the rate change, we thought a summary of the key practical points to think about would be helpful.

Retail businesses

Whether retail businesses increase their prices or not on 1 January 2010, they will have to account for VAT at the 17.5% rate from then on. So if the prices are not adjusted to reflect the rate change, the business will suffer an immediate reduction in margin. The actual reduction in sales value is 1.85%, but of course as this all comes off the gross profit this will have a much bigger impact if margins are very slim. So all retailers who supply standard rated goods need to think in advance about the impact of the change. Whether they re-price or not, the rate will go up, so they will need to consider a mix of three alternatives :

  • Hold prices and take the profit hit
  • Increase prices to maintain margins, or
  • A mix of the two – increasing prices by less that the VAT hike to avoid hitting sales too hard, and accept some margin reduction.

Retailers will also have to consider the practical impact of re-pricing. Whether they start to slowly increase prices from now to all them to spread the impact (both practical and financial) over the next few months is one issue. Another alternative would be to display a sign advising customers that a price adjustment will be made at point of sale to reflect the increased VAT. The law requires that prices in the retail sector are shown including VAT, but the Price Marking Order 2004 (SI 2004/102) allows a period of 14 days for prices to be adjusted, during which time a general notice to customers must be displayed. There is a proposal to allow this period to be extended to 28 days, but I am left wondering about the impact on a business of such an approach. Surely the customers will be decidedly unimpressed?

Web based suppliers

Similarly those supplying goods and services over the internet will need to assess their position on supplies to end consumers. Businesses should now be thinking about what work will be needed to implement price changes, and whether any outside help in re-pricing on the website will be necessary. Businesses which have pre-printed price lists and order forms may also need to take steps to prepare.

Tickets to events

Tickets, including season tickets, to events are liable to VAT when the ticket is sold rather than when the event happens. Organisers of events will therefore wish to ensure that any printing on the tickets which will be sold across the date of the change in rate reflects their intentions. This would need to be taken into account when setting the price of the tickets.

Invoices issued in 2009

Generally speaking, if an invoice is issued to a customer before the change in rate, the VAT chargeable is 15% and not the increased rate. However, as there is ample opportunity for this rule to be exploited in favour of customers who cannot recover all (or in some cases any) of the VAT they bear, there are special rules designed to prevent early invoicing distorting the VAT base. That being said, these rules do not cover all eventualities, so some businesses may decide to raise invoices in December in respect of supplies they will make in early 2010. There is a separate article dealing with the anti avoidance rules – so check there first before launching into a “cunning plan”.

Flat rate supplies

New rates will apply to those businesses making flat rate supplies from 1 January 2010. However, businesses should not adopt the old flat rates in place before the reduction, as HMRC has already warned that there will be some changes to rates. Revised flat rates will be published before the end of 2009.

Coin operated machines

The normal treatment is for supplies to be accounted for when the machine was used. If machine operators do not intend to visit and empty machines during New year’s day, they will need to apportion the sales at the next cash collection date. They will also need to have supporting evidence that the apportionment was reasonable. Once again, as there is a detrimental effect on profit, machine operators will need to consider the impact on their business in advance of the change.

Software

Business will need access to both the 15% rate of VAT and the 17.5% rate for some time after the change happens, as any credit notes raised in respect of supplies made during 2009 will have to be credited at 15%. Purchases should have VAT recovered at the “correct” rate, and if some purchased invoices are delayed this may lead to the recovery of VAT at 15% for some time. Businesses should not, therefore “over write” their standard rate of VAT in their accounting software.
 

Comments
Malcolm Veall's picture

Flat Rate Date

Malcolm Veall | | Permalink

Presumably you mean revised Flat Rates will be published before the end of 2009, (not 2010)?

abelljms's picture

vat increase, or not?

abelljms | | Permalink

But will our Darling go through with it?

I think he will fob it off to 1/7/10 in order to avoid destroying the fragile recovery in economy.

Advice on overwriting the standard VAT rate

Kevin Misselbrook | | Permalink

Regarding the advice not to overwrite the existing standard we would suggest that each business needs to review this advice with their software supplier. For Access users, in most cases, the very best way to implement the change in VAT rate was to overwrite the "Standard" rate of VAT within the system with the new rate. This will mean that all products, customers, and services that had been pre-coded to use the standard rate will immediately pick up the new rate on 1st January. Creating a new "standard" rate could actually create far more work. It is easier to create a new rate for the exceptional items, such as late posted purchase invoices. Businesses also need to take account of any external "feeder" systems that pass transactions into the accounts software, as making a change to the standard default VAT rates may create further problems with integration.

RebeccaBenneyworth's picture

Dohh!

RebeccaBenneyworth | | Permalink

Thanks Malcolm. Correct now.

DuaneJAckson's picture

Won't somebody please think of the FRSers?

DuaneJAckson | | Permalink

A big (yet not often mentioned) problem last year was those businesses on the Flat Rate Scheme that had a rate change imposed on them mid-quarter. Take a business who has a VAT quarter starting in October or November;  they had to report on one rate up until 31/11 and then on another rate from 1/12.

Because the previous rate change was on 1st Dec and the new change is on 1st Jan, half of the people caught out this year will not have been through the same issue last year and will not have last years resolution to re-use - equal opportunities/punishments at work I guess.

KashFlow does of course have a solution to this tucked away in the FRS VAT Settings. It can automatically deal with the above scenario. But I do feel sorry for those having to cope with it on another system.