VAT Changes

In his Pre-Budget Report this week, Chancellor Alistair Darling announced that the standard rate of VAT will be reduced from 17.5% to 15% on 1 December 2008.

This means that for any sales of standard-rated goods or services that take place on or after 1 December 2008, providers should charge VAT at the new rate of 15%.

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 31st December 2009. From 1 January 2010, it will revert to 17.5%.

HM Revenue & Customs (HMRC) is writing to all VAT-registered businesses with a summary of what they need to do. Further guidance is available at www.hmrc.gov.uk but this e-shot highlights some key points.

Key points

* VAT on the sale of standard-rated goods or services taking place on or after 1 December should be charged at 15% and the sales invoice should show the 15% rate.

* If you have received a payment, or issued an invoice, using the 17.5% rate before 1 December 2008 for goods that will be provided (or services delivered) after 1 December 2008, you have a choice.

* You can leave the VAT charged to your customers at 17.5% and account for that to HMRC.

* Or you can account for VAT at the new rate of 15% on amounts received or invoiced. You will need to issue a credit note and refund the difference in VAT to your customer if you have already issued a VAT invoice showing the 17.5% rate.

* If you give a refund for a product sold before 1 December, the refund should use the 17.5% VAT rate.

* If you use accounting software, you will need to change the VAT code to 15% on 1 December 2008. Tills must also be reprogrammed to show the right VAT rate from 1 December.

* If you are a retailer, you do not legally have to reduce your prices after 1 December, even though 15% will apply. If you are asked for a VAT invoice, it must show the correct VAT rate.

* The deadlines for submitting VAT returns and making payments stay the same. If the period of your return covers before and after 1 December 2008, add together the VAT on sales charged at 17.5% and the VAT on sales charged at 15% to work out the total VAT on sales. HMRC has indicated it will adopt a "light touch" in relation to errors in the first VAT return after the change.

* The Cash Accounting and Annual Accounting Schemes remain unchanged. However, the Flat Rate Scheme percentages are changing to reflect the new rate of VAT.