VAT Update

As most of you will all ready know the VAT rate is to drop on Monday 1st December 2008 from 17.5% to 15%, until 31 December 2009 only.

The question facing most of us is how will this affect us?

From Monday all new invoices raised and all sales made will need to have VAT charged at the new rate.

However invoices raised prior to Monday which are still outstanding will be paid at the old rate.

Who benefits from the changes?

VAT registered businesses should not see any benefit from the change. Although those not passing on the VAT saving to their customers may see profits increase by 2.5% VAT now retained.

Those that benefit should be non-VAT registered businesses and the end customers.

We will not see any reduction in many of our day to day necessities as these are either zero rated, exempt or reduced rate. This includes food, children’s’ clothing, dentist bills, gas and electricity.

Many other items will not be reduced as prices are normally quoted gross rather than net and suppliers may chose not to pass the saving on to the customer, particularly if they are already making losses.

The Government is trying to persuade all businesses to pass on the savings immediately.

What do you need to do?

For those on a computerised accounting system you will need to ensure that your software is set up to deal with the changes.

A new VAT rate will need to be set for the new invoices, while keeping the old VAT rate to pay the old invoices.

Everyone being paid by standing order will need to make the necessary adjustment at the right time to their standing orders. This may not all happen on 1st December as often invoices are paid in arrears.

It will also be worthwhile checking invoices received to ensure the correct rate of VAT has been charged, depending on the date of the invoice.

Payments on account

Payments on account may cause a problem, particularly for those of you using cash accounting for VAT. On receipt of the money 17.5% VAT will have been accounted for, and paid to HM Revenue and Customs, however, on invoice after 1st December only 15% VAT will be charged. This will cause a discrepancy in the VAT accounts.

If at all possible try to ensure all payments on account are completely cleared by 30 November by invoicing before this date.

For all remaining payments on account, the treatment will depend on your accounting software and also the way you currently account for VAT, either cash accounting, flat rate scheme or normal accounting.

Please discuss this with us as soon as possible if it is likely to affect you.

Flat rate scheme

For everyone on the flat rate scheme, HM Revenue and Customs will be issuing new rates as soon as possible in line with the decrease in the VAT rate. While it may be attractive to think this will be a reduction of 2.5%, it is unlikely to be, as not only would your sales VAT decrease but also your purchase VAT, and the aim of the flat rate scheme is to keep you in a similar position to the position on normal VAT accounting.

As soon as the new rates are announced we will try to inform all our clients.

The first period this will affect will be the VAT quarter ending 31 December 2008, and the changes will not be accounted for until January when preparing your VAT returns.

31 December 2009

The pre budget report makes this change until 31 December 2009 only, and come 1st January 2010, unless the period is extended we will all be changing back again.

Fortunately we will all have a little longer to prepare for the change back to 17.5%, and I am sure the increase will be passed on immediately by all suppliers.

The same problems discussed above will occur again on the change back, however as you are aware of the situation you may be able to avoid some of them, particularly accepting payments on account, without invoicing.

If you require any further help on accounting for the change in VAT rate please contact us as soon as possible.