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PBR 08: Darling's VAT change puts software on the spot

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26th Nov 2008
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The chancellor's sudden decision to change the standard rate of VAT from 17.5% to 15% from Monday 1 December has triggered a flurry of activity and anguish in the financial software industry. John Stokdyk reports.

Most popular accounting packages such as Sage 50, QuickBooks, MYOB and Microsoft Office Accounting include facilities to add or amend standard VAT rates. Accounting software as a service suppliers such as Pearl, Xero, NetSuite and e-conomic have also been quick off the mark to reassure users that the standard VAT rate will be adjusted automatically on Monday morning.

But as has been discussed elsewhere on AccountingWEB, the most complex issues are to do with the transition period. For example, what is the best way to effect the 13-month change in software VAT settings, and how are users going to deal with orders and invoices that span the 14-day transition period from 1 December?

BASDA, the business software trade association, has been the focus of intense debate over the past two days on whether the best approach to take is to edit the percentage of your current VAT code, or to create a new VAT code which will become the new default as at 1 December. The consensus that emerged is that changing the percentage against the current VAT code is the easiest solution to deliver. However, BASDA highlighted a number of issues that should be considered:

  • Impact on audit data by having one code serving 2 historic percentage rates
  • The impact if you have date-sensitive VAT rate changes.
  • The need to be able to transact at 17.5% after 1 December for credit notes, posting older purchase invoices, and cash accounting payments.
  • Interaction with other systems that integrate with your accounts software.
  • Impact on reports and documents when making a rate change.
  • Necessity to apply VAT rate changes against acquisition tax and other VAT rates.
  • Impact and treatment of part-processed transactions that span the changeover date, for example part-invoiced sales orders, or repeat transactions that recur automatically.
  • Impact on invoice matching routines where the expected gross value may have changed.
  • Mechanisms to allow users to review and change their pricing if using gross prices for the retail trade and issues on price-point pricing.

Problem scenarios that have been raised so far by developers and AccountingWEB members include mail order catalogues and ecommerce websites that will need to undertake wholesale revisions of VAT-inclusive prices, or leave prices as they are and keep the 2.5% difference. Vending machines will be even more difficult to reprogram, so most will continue charging the standard rate, with distributors enjoying a little December windfall.

But the real problem for business software users is where their systems have the 17.5% rate hard-wired into their code. One reseller alerted AccountingWEB to problems with Pegasus Opera II, which retains the VAT rate entered on an order as part of the transaction. Those users who have taken orders that will not be fulfilled until after 1 December will have to undertake a lot of irritating adjustments.

"We're in the same position as a lot of finance software houses in that this landed on us from some height in fairly short order," commented Pegasus commercial director Kevin McCallum. " Opera II can deal with the changes from a statutory point of view, but a lot of people will not have been in that part of the system for a long time. We're evaluating exactly where it's affecting us. We haven't got everything sorted yet, but will work round the clock to do the right thing for our customers and partners. It would have been nice to have more information in advance."

CODA, which supports a number of clients in the retail sector, found that the VAT rate cut is likely to cause more problems than it solves for retailers who have already been discounting their prices. Such a late change is likely to pose more risks during heavy pre-Christmas trading and will add complications around communicating price changes and handling customer refunds.

"It is clear from talking to our customers that many are unprepared for this change which comes into effect from Monday," said CODA group marketing director David Turner. "They usually have months to prepare for this kind of thing and test the associated systems, but introducing it at this time of year will cause a huge amount of confusion. Retailers generally ‘lock-down’ their systems in the run up to Christmas, to avoid the risk of IT failures in their busiest trading period. Although the VAT changes are simple enough to make within the accounting system, there are other complications."

In it's introductory guide to the changes, HMRC acknowledged that the short timescale for change would create problems. "Therefore we will adopt a 'light touch' in relation to errors or mistakes made in the first VAT return after the change. We will take into account the difficulties a business has faced in adjusting to the change." If businesses discover any errors in their VAT returns, they can correct them in the normal way by making a voluntary disclosure or correcting it on your next return, the department said.

Further reading
PBR 2008: VAT rate cut to 15%
PBR 2008: Change in the rate of VAT – A how to do it guide
PBR 2008: VAT rate change – the taxpoint rules
PBR Blog - Can anyone see how the VAT rate cut can work?
Any Answers: New VAT rate - Split periods
Any Answers: Sage & VAT Flat Rate Schemes
A summary guide for VAT-registered businesses (4pp HMRC PDF file)
VAT - Change in the standard rate (44pp HMRC detailed guide in PDF)

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Replies (7)

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By SteveBliss
14th Dec 2008 21:47

Liberty and VAT changes
I have to say, albeit belatedly, that the team at Athene Systems made the required VAT changes in Liberty Accounts a very smooth and seamless exercise. It is not the first time that I have been impressed with the quick and accurate updating of their on line accounting system

Steve Blissett
Rodliffe Accounting Limited

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
28th Nov 2008 16:25

Industry in a tizz
Thanks all for sharing experiences comments and updates. We've had lots of calls and press statements on this subject in the past couple of days from software companies.

Sage was not alone in its about-turn, Martin. Its initial advice followed HMRC's suggestion to create a new code, but following an intense debate within BASDA on Monday and Tuesday the developers reached a consensus that the best way to proceed was to amend the standard tax code.

MYOB, in its advice to users, summarised the following process to work around the transitional dates: 1. Alter the standard VAT rate from 17.5% to 15% on Monday morning. 2. Set up a new 17.5% VAT code (named 'S2' for example) for whenever you need to use the old 17.5% VAT rate. This might apply where a purchase invoice you receive on 3 December 2008 is dated 27 November 2008, so the S2 code would be applied to give you the older 17.5% rate.

As the article mentions, check first with your developer whether your application will alter the recorded VAT rate when you go back into a transaction - this will vary from package to package.

Kevin McCallum from Pegasus has also been in touch to clarify how Opera II handles VAT. He challenged the implication in the article that the VAT percentage rate was "hardwired" in Opera II. That was not what the story says, but the way the article runs may have left that impression, so I am happy to pass on Kevin's assurance that the VAT code has always been editable within Opera and Opera II. He added that the VAT rate is stored within the database at the point of order creation, so the difficulty Pegasus and its users face - which is shared my most other applications - is that any amendments to this historical information will require users to be aware of and understand the HMRC guidance.

Links in the article point to summary guidance, more technical background and TaxZone's "how to" guide.

John Stokdyk
Technology editor
AccountingWEB.co.uk

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By User deleted
28th Nov 2008 15:02

Guide to changing standard VAT codes in QuickBooks
Hi John,

To help businesses and accountants through this transition, we have published an FAQ section on our website including detailed guidelines on how to change the standard VAT rate in QuickBooks. Please see the FAQs section of our website.

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
27th Nov 2008 11:47

Useful round-up from SWAT
David Norris at SWAT has published a useful little guide to the advice coming from the main software houses:Sage was quick to publish a PDF guide
QuickBooks does not have a similar document, but includes details of the VAT function on its support site. As Melanie Vala comments above, Inuit has updated this information with further details in the user FAQs section.
MYOB has issued guidance for users of MYOB and Do$h accounting packages.
Microsoft Office Accounting users and members of the Microsoft Professional Accountants Network are advised to seek advice from the MPAN page.

In some cases - including many versions of Sage 50, users are warned that once the standard VAT rate has been changed, any invoices that are amended at a later date will recalculate VAT, leading to potential problems. Several QuickBooks users have also been discussing problems with VAT in the 2008 edition in Any Answers.

John Stokdyk
Technology editor
AccountingWEB.co.uk

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By axw001
28th Nov 2008 10:05

Flat Rate Caution
A number of accounting packages, both online and PC installed, claim to support the Flat Rate VAT scheme.

If you are using such packages with your clients you should be aware that it is theoretically possible for a business to be subject to 3 separate flat rates during a single VAT period if their discounted period comes to an end during the period in which the VAT rate transitions.

For less mature products, or those not focussed on the needs of UK business, there is no support for flat rate and this won't be an issue, but for less robust software implementations of the Flat Rate scheme impacted users are likely to have to "revert to manual" if they are to file an accurate VAT return.


Needless to say, this is handled with no fuss in our product.

Alan Wright
Director

[email protected]
Accounting Software - Online from Liberty Accounts - Designed for UK business

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By MartinGatehouse
27th Nov 2008 18:56

Sage Guidance
I have just spent most of the day on the telephone and email, advising clients using installed accounting systems on how to deal with the VAT rate change.

Sage Customer Support muddied the waters by issuing a blanket email instruction to add a new VAT code, and then retracting it the very next day by saying edit the existing one!

Xero on the other hand will automatically deliver a smooth transition to the new 15% VAT rate within the software, and explain the process to my clients on time, using the built in Dashboard alert system.

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By User deleted
27th Nov 2008 15:53

Sage Line 50 Orders - BE WARNED
We are a business that distributes only in January and August due to the nature of our product and we also in the position of that of an Opera II user that once the order is input the vat rate is stated.

After speaking with sage to discuss we were advised to firstly amend Sage to show the 15% vat rate then amend the orders to reflect this by manually amendments to each order.

As each of our orders have in excess of 100 lines and we have over 250 orders to process the time to do this would have taken one employee one whole week working exclusivly on this project. Would the governement pay for this ?

After further discussions with sage they suggested that we create a new account and amend the customer account initialy with this new one and then back to the original customer.

Now this does work to change the vat rate but be warned that all delivery address details are lost as it goes back to the default addresses and the is especially problematic where you have multiple orders to the same customer all with different delivery adresses

Therefore we have decided to process the orders in their original format and issue credit notes for the 2.5%

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