Chancellor announces reduction in standard VAT rate

Alistair Darling has today announced a package of measures to stave off the worst effects of the economic downturn.

Among these is a reduction in the standard rate of VAT from 17.5% to15%. This will take immediate effect from Monday 1 December 2008 and continue until 31 December 2009.

Many businesses will not be aware that there are choices as to whether the new rate is applied to work done under an existing contract but not completed at the time of the change.

There are important implications for ongoing supplies such as building maintenance, construction services, rental income, contract hire, hire purchase and club etc subscriptions. Also for supplies of goods where deposits or stage payments are taken. Clearly this will have an impact on some customers and it is important to be seen to minimise the VAT cost.

As a customer it is equally important to ensure you are not charged more than you need be if the VAT charge is destined to become a cost to you as an individual or a business.

Rules governing the change of rate

Supply of goods

Under normal circumstances VAT is due on a supply of goods at the earlier of the following events: removal of the goods from the supplier’s premises or receipt of payment. The issue of an invoice within 14 days of removal overrides the removal.

The supplier can elect to use the date of removal of the goods to fix the time of supply (taxpoint) and charge VAT at the rate in force at that time. This need not apply to all sales and the supplier can choose the best option for the customer.

If the goods are supplied on a sale or return basis the date on which it becomes certain that the customer will accept the goods can be used to determine the rate of VAT.

Supply of services

The default taxpoint for a one-off supply of services is the date of completion. Under normal circumstances this is overridden if it is preceded by a tax invoice or payment.

If services are performed over a period that includes the date of change, suppliers can elect to apportion the work to reflect the amount that is appropriate to the new VAT rate.

Continuous supplies of goods or services

If payment has been received for services that have not been provided the new VAT rate can be applied to that element of the services that had not been performed at the time the rate changed.

Invoices that are issued in advance with a number of taxpoints are no longer valid and must be replaced with new invoices referring to the original annotated with a statement to say that the new invoice cancels and supersedes the original.

Reduced VAT charge where a tax invoice has been issued

The supplier must issue a credit note within 14 days.

Club etc membership subscriptions

The procedure for continuous supplies of services should be followed. It will be necessary for the club to refund the overpaid VAT to the members; otherwise HMRC will refuse to pay the refund on the grounds of unjust enrichment.

Secondhand goods

If the goods are supplied under the margin scheme and are still on the supplier’s premises at the time the new rate comes into force the supplier can apply the new rate to the sale even if the goods have been paid for, in whole or in part. There is no need to inform the customer as a VAT invoice must not be issued for margin scheme goods. This has particular implications for the motor trade.