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Action on change of VAT rate
The Chancellor, as anticipated, announced to-day, 24 November 2008,
a reduction in the standard rate of VAT to 15% as part of the measures
to be taken to combat the economic recession. The reduced rate will
apply from 1 December 2008 (and through to 31 December 2009, although
that might change). Section 2, VAT Act 1994 allows a Treasury order
to be made varying the standard rate by up to 25% - that is, by
up to 4.375% at present. However, European rules require that the
standard rate should not be lower than 15%.
With a VAT rate of 15%, the VAT fraction is 3/23rds.
At times when the VAT rate is increased, it may be necessary to
refer to contracts to ensure that the increased rate can be charged.
It is unlikely that any customer will object to a lower rate being
charged.
VAT is chargeable at the rate in force at the time of supply (the
date goods are delivered/made available to the customer or services
are completed) unless that basic tax point is superseded by an earlier
payment or issue of an invoice within 14 days of the basic tax point
(the 14 day period may be extended with HM Revenue & Customs’
(HMRC) agreement).
For supplies whose time of supply is on or after the date of the
rate change, the new rate must be applied.
However, special provisions apply at the time of any change in
the rate of VAT. HMRC’s detailed guidance in Notice
700, the VAT Guide, can be seen here.
In brief, the supplier can choose which rate to apply, either for
all supplies or individual supplies. For most businesses, the special
provisions can be summarised as follows (these provisions do not
however apply to self-billing arrangements):
| Sales options |
Either |
Or |
And/Or |
| Goods (assumes practice is to invoice within 14 days of delivery) |
|
|
|
| Goods delivered before change of rate, but not invoiced |
Charge VAT at rate in force on date of delivery |
Charge VAT at new rate in force on invoice date |
|
| Goods invoiced or paid before change of rate, but not delivered |
Allow rate charged on invoice to stand |
Credit original invoice and re-invoice at new rate* |
|
| Services (assumes practice is to invoice within 14 days of
delivery) |
|
|
|
| Services completed before change of rate, but not invoiced |
Charge VAT at rate in force on date of completion |
Charge VAT at new rate in force on invoice date |
|
| Services invoiced or paid before change of rate, but not delivered |
Allow rate charged on invoice to stand |
Credit original invoice and re-invoice at new rate* |
|
| Services part-completed before change of rate, but not invoiced |
Charge VAT on whole consideration at rate in force on date
of completion |
To the extent that services were complete before rate change,
charge VAT at rate in force on part-completion |
To the extent that the services are completed after the rate
change, charge the balance of consideration at the new rate |
| Continuous supplies of services |
Charge VAT at rate in force on date of invoice |
To the extent that services were carried out before the rate
change and can be quantified, charge VAT at the rate in force
before the change |
|
| Purchases |
Ensure that you |
And |
|
| Goods or services |
Recover VAT at rate charged by supplier |
Ensure correct VAT fraction is used |
|
* Credit notes used simply to allow re-invoicing at the changed
rate must be issued within 14 days of the rate change. Note however
that where a credit note is issued to correct an error or otherwise
in the course of ordinary business, the credit note must show the
VAT rate in force at the time of the original invoice.
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