VAT rate change - The practicalities for retailers

The widely trailed 2.5% VAT rate reduction was duly announced in the Pre-Budget Report, taking effect on 1 December 2008, for a temporary period until the end of 2009.

The UK has not seen a change in the standard rate of VAT since 1991 with the result that any changes are likely to create a number of issues for retailers. This Briefing looks at the practicalities of dealing with a rate change and offers some tips on how to manage the transition, with opportunities for retailers to pass on this cut to the consumer. We also address an associated consumer protection issue

1. Consumer Price Indications - Staying Compliant

The proposed VAT changes will impact on the communication, advertising and promotion of pricing to non-business individual consumers. Given that all price indications made by businesses to such consumers are required to be made inclusive of VAT and any other charges payable , a likely consequence of the change is that pricing material and advertising copy may become out of date and inaccurate over night. Retailers are required by the Consumer Protection from Unfair Trading Regulations 2008 to ensure that pricing information is accurate and not misleading - non-compliance may result in an investigation (even prosecution) by Trading Standards authorities or a complaint being made to the Advertising Standards Authority. In order to avoid such an investigation or complaint it is important that retailers begin to look at practical ways to ensure that consumers are not misled as a result of the changes.

2. Which rate of VAT applies ?

Special tax point rules can be adopted when there is a rate change. These rules allow the tax payer to charge VAT at the rate applicable when the "basic tax point" is triggered.

It is important to note that this does not affect the timing of the supply for VAT accounting purposes.

For example, XYZ Ltd has raised a VAT invoice/receives payment for the goods on 21 November. On 1 December the rate of VAT decreases. XYZ Ltd makes the goods available to the customer on 10th December.

Under the normal tax point rules the effective date of the supply is 21 November (invoice / payment date). VAT is therefore due on the supply at the higher rate. However, the special provisions allow for XYZ Ltd, if it so wishes, to charge VAT at the rate applicable on 10th December (that being the "basic tax point" for a supply of goods).

Despite this, the supply is treated as taking place on 22nd November from a VAT reporting point of view and should be accounted for accordingly. If XYZ Ltd is required to submit a VAT return for the quarter to 30 November this supply would be recorded in this quarter but at the rate applicable on 10th December (i.e. the lower rate).

The rate of VAT chargeable should be shown clearly on the VAT invoice raised. Where an invoice has been issued incorrectly citing the old rate of VAT this should be amended by way of a credit note and an invoice issued stating the new rate (see 10 below).

The special change of rate provisions do not apply in all circumstances, including a case where a VAT invoice has already been issued under an approved self-billing arrangement.

In this situation if XYZ Ltd had raised an invoice within 14 days of making the goods available to the customer this would be the tax point date and it could take advantage of the rate decrease without using the special provisions. This would also mean that XYZ Ltd would not need to account for the VAT until the quarter to the end of February.

Businesses using retail schemes should check their scheme's rules but will generally have to perform two calculations for the period in which 1 December falls. One at the old rate and one at the new.

ACTIONS

- Check the tax point of a supply - apply the tax point that allows for VAT to be charged at the new lower rate - this is especially important for VAT sensitive businesses where VAT is an absolute cost - they will wish to ensure that their suppliers give them the benefit of these rules.

- Structure current transactions such that, where possible, a tax point triggers after a rate change (where the rate decreases).

- Ensure VAT is reported in the quarter when the actual tax point is triggered rather than when the basic tax point is triggered (if you are using the special provisions order).

-Check retail scheme rules.

3. What to do when a supply of a service straddles the rate change

Supplies of services provided before and after a rate change can be subject to VAT at the old rate on the part of the work performed before the date of the change and at the new rate on the part performed after that date.

This is the case where it is possible to apportion the supply on the basis of measurable work or in accordance with a normal costing or pricing system.

ACTIONS

- Take steps to ensure that where possible the lower rate of VAT can be applied to the supply - especially where the recipient of the supply is a VAT sensitive business.

4. Dealing with continuous supplies of services

This will apply to businesses that provide continuous services over the course of a year, such as supplies of goods on hire, lease or rental

Businesses that issue annual invoices - new invoices will need to be produced for any payments due on or after 1 December.

The new VAT invoice should make reference to the original VAT invoice; and show tax chargeable at the new rate.

Which rate of VAT should be charged?

The normal rules dictate that payments received before the rate change should be subject to VAT at the old rate and payments received after the rate change subject to VAT at the new rate.

However, the special provisions allow for the tax payer to account for VAT at the new rate on that part of the supply made after the change, even though the tax point (payment) would occur before the change - for example where payment is received in advance of the supply.

If, for example, the services are supplied in October, November and December and are paid for on 1 October, then. despite the fact that the tax point for services undertaken in the quarter to December is 1 October, the higher rate of VAT remains applicable to the services supplied for the period 1 October to 30 November, with the lower rate applying to the services supplied after 30 November.

ACTIONS

- Put triggers in place to issue new invoices where appropriate.

- Take advantage of the special provisions where appropriate - recipients of supplies which cannot recover VAT in full will wish to ensure their suppliers do this - eg a bank making payments under a lease.

5. Existing Contracts

What impact does the rate change have on the price stipulated in an existing (pre 1 December) contract that has not yet completed? At what rate is VAT due?

The consideration payable under the contract will decrease to reflect the change in the rate of VAT where the following conditions are satisfied:

• The supply is made after 30 November (applying the tax point rules summarised in 1 above); AND

• the contract does not provide otherwise.

The Seller should, unless the agreement states otherwise, collect VAT from the Buyer at the new rate. The purchaser is therefore required to pay less than the originally agreed consideration.

ACTIONS

- Take this into account where payment is being provided/requested.

6. Additional payments

What happens where a further payment is required after 30 November, such as a price escalation or upwards adjustment ?

In some instances there is a requirement on the part of the buyer to pay an additional sum to the seller after the supply of goods/services has been made. If, the tax point date for the original supply was on or before 30 November and the date of the further payment is after that date, VAT is due on the additional payment at the old VAT rate.

Please note that this only applies to supplies of goods and services for which the tax point has been determined under the rules set out in section 1. In all other cases the receipt of an additional payment or the issue of a new invoice (whichever happens first) will themselves create a new tax point tax point and VAT will be chargeable at that time and if necessary at the new rate, on the amount then received or invoiced.

ACTIONS

- Ensure that VAT is charged on later payments at the correct rate

- Ensure that the additional payment is treated as further consideration for the original supply, rather than a payment triggering a separate supply.

7. Hire purchase etc

Items provided under hire purchase agreements, credit sales or conditional sale offers are deemed to be supplies of goods. As a result, the normal tax point is the earlier of the following : the date of the removal of the goods; the date of issue of the agreement (where it is in the form of a VAT invoice); or the date of the issue of a separate invoice.

Where there is a VAT rate change, the tax payer can choose to apply whichever date results in them paying the lowest rate of tax.

8. Accounting systems

Businesses will need to check that their IT systems can deal with the change which takes place on 1 December.

ACTIONS

- Ensure that systems apply the new rate from the correct date.

- Check to ensure that where the special provisions have been applied these are being picked up by the system.

9. Newly registered businesses

Newly VAT registered businesses are required to follow the standard tax point rules in determining whether their supplies were made before or after the date of registration; they cannot take use the special provisions summarised in paragraph 1 above for this purpose.

10. How does the change affect input tax incurred on costs

Input tax incurred on costs should be recovered as follows:

(a) VAT should be recovered at the rate stated on the invoice provided by the supplier.

(b) Where the invoice is less detailed and a VAT amount is not shown separately, it should be calculated by applying the VAT fraction applicable at the date of the tax point (3/23rds where the VAT rate is 15% and 7/47ths where it is 17.5%).

(c) A single invoice, issued before 1 December in respect of a continuous supplies of services, which details dates and amounts due over the year, will not be valid in respect of those amounts paid after 30 November. In this situation the supplier must issue fresh VAT invoices for the payments due after the change, making reference to the initial invoice and showing details of the amount of tax chargeable at the new rate. The input tax record should be adjusted accordingly.

11. VAT charged at the incorrect rate

When the VAT amount on an invoice needs to be adjusted (as shown in 1 above) it is necessary to issue a credit note. The current 14 day period for doing this will be extended to 45 days from the rate change (ie by 14 January 2009).

This should include the following information:

• the identifying number and the date of issue of the credit note;

• the name and address of the business and registration number;

• the customer name and address;

• the identifying number and date of issue of the VAT invoice;

• a description which identifies the goods or services supplied; and

• the amount of VAT being credited.

12. Conclusion

Eversheds can advise on the full implications of these VAT changes and how they should be implemented. We can also assist by looking at viable consumer protection options for your business, making sure your advertising is fully compliant and helping you to handle interest or enquiries from the authorities.

For further information please contact your usual Eversheds contact or one of the following VAT specialists:

Martin Scammell- martinscammell@eversheds.com

0845 497 0704

Alan Connell - alanconnell@eversheds.com

0845 498 4249

Damian Shirley damianshirley@eversheds.com

0845 497 1423

and for Consumer Protection advice:

David Young - davidyoung@eversheds.com 0845 497 1148