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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(the date goods are delivered/made available to the customer or services are completed) unless that basic tax point is superseded by an earlier payment or issue of an invoice within 14 days of the basic tax point (the 14 day period may be extended with HM Revenue & Customs’ (HMRC)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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