PBR REACTION & ANALYSIS: VAT CHANGES

With effect from 1 December the standard rate of VAT is reduced from 17.5% to 15%.  This means that cash businesses which currently calculate their VAT using the VAT fraction of 7/47 should now use the new VAT fraction of 3/23. Only standard-rated sales are affected.  There are no changes to sales that are zero-rated or reduced-rated for VAT.  Similarly, there are no changes to the VAT exemptions.

The 15% rate will remain until 31 December 2009 and from 1 January 2010 it will revert to 17.5%.  Legislation is proposed to ensure businesses do not use artificial schemes to benefit from the 15% rate on goods and services provided after the VAT rate reverts to 17.5%.

How the change will affect a trader’s standard-rated sales will depend on how he normally accounts for VAT.

(A service is regarded as having been supplied when all the work involved has been completed bar invoicing itself).

For continuous supplies of services, such as ongoing construction work, you should account for the VAT due whenever you issue a VAT invoice or receive payment, whichever is the earlier.  In these cases, invoices issued or payments received on or after 1 December will be subject to 15% VAT.

If you have received a payment or issued an invoice before 1 December 2008 for goods that will be provided (or services delivered) after 1 December 2008, you have a choice.  You can choose to account for VAT at the new rate of 15% on the amounts already received or invoiced.  You do not need to tell HMRC if you do this.  In these circumstances, any payments received or invoices issued after 1 December will always be subject to the new rate of 15%, but you do need to issue a credit note to your customer if you have already issued a VAT invoice showing the old rate of VAT.  The credit note must, however, be issued within 45 days of the rate change date.

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