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VAT Update

In an attempt to soften the blow of the current economic downturn, the Government last week announced a temporary reduction in the standard rate of VAT from 17.5% to 15%. The reduction came into force on 1st December and will last until 1st January 2010.

This reduction has a number of implications for businesses.

Any sales of standard rated goods and services which take place during the period in question will attract a VAT charge of 15%. Only standard rated sales are affected – there are no changes to sales which usually attract either no VAT or a reduced rate of VAT.

If a business is a retail business which makes mainly cash sales to customers who are not registered for VAT (a shop or restaurant, for example), then that business should use the new rate of 15% for all takings received on or after 1st December except where a customer has paid for something they took away (or had delivered) before 1st December. In that case, the sale took place before 1st December and the old rate of 17.5% must be used.

If a business sells mainly to other VAT registered businesses and has to issue VAT invoices, then the position is different. In these circumstances, the business should use the new rate for all VAT invoices issued on or after 1st December except (a) where the business provided goods and services more than 14 days before the VAT invoice was issued, or (b) the business was paid before 1st December. In these circumstances, the sale took place before 1st December and the old rate of 17.5% must be used.

In cases where there is ongoing work in progress (for example, ongoing construction work), then a business should account for the VAT due whenever the VAT invoice is issued or payment is received, whichever is the earlier. In these cases, invoices issued or payments received on or after 1st December will be subject to VAT of 15%.

If a business has received a payment or issued an invoice before 1st December for goods or services which will be provided or delivered after 1st December, the business can account for VAT at the new rate of 15% on the amounts already received or invoiced. In these circumstances, any payments received or invoices issued after 1st December will always be subject to the new 15% rate. However, the business will need to issue a credit note to the customer if the business has already issued a VAT invoice showing the old rate of 17.5%.

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