VAT Rate Reduction

From 01st Dec 08 the standard rate of VAT will reduce to 15% in order to boost consumer spending. It will revert back to 17.5% on 31st Dec 09.

This is going to cause complications for VAT registered businesses as they will need to decide if they are going to pass on this reduction to their consumers and if so how. There is no need to make a change to VAT inclusive prices but you do need to record the correct rate internally.

The VAT due on all your sales must be recorded at the correct rate from 1st Dec 08. Only VAT at the standard rate has reduced and zero and reduced rate VAT remains the same.

So, if you sold something for £1175 inc VAT now (Nov) you will have collected £175 in VAT for the Chancellor. If, however, your sale was made in Dec and you charged £1175 inc VAT then you would only have collected £153.26 VAT and have made an extra £21.74 profit.

Invoices issued after 1st Dec 08 must show the new 15% for standard rated items. However, if your invoice is for something that was completely delivered before 18th Nov 08, or you were paid for the complete sale before 1st Dec 08, you should use the old rate of 17.5%.

There are specific rules to consider if your business receives stage payments for long contracts. The VAT date is the date you issue an invoice or receive a stage payment, so if the invoice is issued after 1st Dec 08 you must account for the VAT at 15%, even if the work it relates to has been carried out before this date.

For those businesses that use the flat rate scheme there will be a new flat rate for each sector. You must look up your new rate here (appendix E). You must apply the new rate from 1st Dec 08 to stay on the flat rate scheme.

If you use the cash accounting scheme you will need to be ensure systems are in place to record when the sale was made and when the invoice was issued. You need to pay over VAT of 17.5% for sales made before 1st Dec 08 even if you receive the payment on or after this date.

Please be aware that this is my interpretation of the rules regarding the reduction in the VAT Rate and I strongly advise everyone that is unsure of the rules, and how they will affect their business to seek the guidance of their accountants. Please ask your accountant to run through the VAT rules in relation to your business.

Remember this VAT change is only temporary and everything will revert to 'normal' on 1st Jan 10.

If you need help changing your systems or recording your invoices correctly give me a shout!