News
December 2008
VAT Update
The standard rate of VAT was reduced in the Pre-Budget Report from 17.5% to 15% for the period from 1 December 2008 to 31 December 2009. It will then revert back to 17.5% on 1 January 2010.
The rate change presents a number of challenges to clients – here are some of the key issues:
VAT fraction
The VAT fraction is used to calculate the VAT element of a price that includes VAT. For a 15% rate of tax, the relevant fraction is 3/23. So if you fill up your car with petrol costing £50, the amount of VAT you have paid after 1 December is £6.52 i.e. £50 x 3/23
Price adjustments
For clients who need to reduce the price they charge for goods or services sold on a VAT inclusive basis, the key fraction is 46/47 of the current selling price. So if an item sold before 1 December is priced at £11.75, the new price to ensure the VAT saving is fully passed on to customers is £11.75 x 46/47 i.e. £11.50.
It is important to remember that the price of zero-rated, reduced rate (5% VAT) or exempt items is unaffected by the VAT cut (e.g. food, books, newspapers) – only the price of standard rated items needs to be changed.
Deposits paid or invoices raised in advance
If a business has raised invoices or received payments from customers before 1 December 2008, then VAT will have been correctly accounted for at 17.5%. This is fine – but if the goods or services are actually supplied after 1 December, then the supplier may make an adjustment so that VAT is only charged at the rate of 15%.
The adjustment must be made by issuing a credit note to correct the original invoice – the supply is then based on the 15% rate of VAT. This process is optional for a supplier – and will only be worthwhile if the customer in unable to claim VAT himself.
Work overlapping 1 December
There is good news for clients providing services (e.g. a builder) where the work is started before 1 December and finished after this date. In such cases, the VAT charge is based on the new rate of 15% when an invoice is raised or payment received at the end of the job. There is no need to apportion the VAT on a time basis between e.g. November and December work.
