VAT: How to deal with a cut in rates
Understanding the tax point rules is key to getting the VAT right on protective equipment and e-publication sales that overlap the VAT rate reductions from 1 May 2020.
The change for electronic books, booklets, brochures, pamphlets, leaflets, newspapers, journals and periodicals (including magazines) as well as electronic versions of children’s picture and painting books, took effect on 1 May 2020, seven months ahead of schedule. The change is permanent and means these sales are now subject to the same VAT rate as printed publications.
The reduction in VAT rate for PPE is temporary from 1 May to 31 July 2020. Both reductions have been prompted or accelerated by the coronavirus pandemic.
Sales overlapping rate change
What rate of VAT applies to PPE sales agreed and paid for before the rate change but where the goods were supplied on or after 1 May? In the case of online subscriptions for publications, what is the situation with annual fees paid, say, at the beginning of the calendar year?
Book Club Ltd charges an annual subscription of £72 including VAT, which is paid by subscribers in January each year. This entitles those subscribers to download an ebook each month during the year. The company does not issue any invoices because all its customers are individuals not businesses (B2C) and do not need one.
Example: e-book subscription club
The payments create a VAT tax point in January 2020, a time when the supplies of online publications were standard rated. Output tax of £12 per subscription would have been declared on the company’s VAT return that included this month. This outcome is based on the “actual tax point” rules, where VAT is due according to invoice or payment date, whichever happens first (VAT Notice 700, para 14.2.2).
VAT refund opportunity
There is an opportunity for Book Club Ltd to give a VAT credit of £8 to its annual subscribers, and reduce its output tax, to reflect supplies received from May to December 2020, ie when the zero-rate applies ((8/12 x72) x 1/6).
This opportunity is created by the fact that the legislation allows a ‘special change of rate provision’ whereby VAT can be accounted for according to the ‘basic tax point’ rather than the ‘actual tax point’. The basic tax point occurs when the customer receives the goods or services in question. It is up to suppliers whether they go down this route, ie it is an optional arrangement (VAT Notice 700, para 30.7.4).
However, where the subscription arrangement is a continuous supply of services the special provisions are clarified by VAT Notice 700, para 30.9.
What would be the position if, say, a care home ordered and paid for PPE supplies in April 2020 but received them in May? The advance payment in April creates an actual tax point for VAT purposes, with output tax payable as a standard rated supply.
But the goods are received on a date when the zero-rate is in force, ie this is the basic tax point. So zero-rating is available when the goods are supplied, according to VAT Notice 700 para 30.7.4.
Cash accounting scheme
Care is needed for businesses that use the cash accounting scheme.
Assuming the special provisions considered above are not utilised, standard rated invoices raised before 1 May for PPE and e-publications will not be included on a VAT return until they are paid, which is likely to be May or later. Output tax is payable on these sales, whereas other receipts in May might be zero-rated. Extra care is needed to make sure that the cash accounting scheme calculations are correct.