Effects of a 2.5% fall in the standard rate of VAT

1. Partially exempt and non registered businesses should defer expenditure until the rate is in force (and accelerate expenditure prior to the rate increasing again in the future).

2. The flat rate scheme rates have also been reduced – businesses registered under the flat rate should ensure that they apply the revised rate.

3. Businesses may elect (VAT Act 1994 s 88) that the tax point becomes the basic tax point (being the date on which services are actually supplied or goods actually made available) rather than the earlier of payment being made or a VAT invoice issued. This election may be made for some or all supplies. No notification to HMRC is required.

 4. Businesses who raise their invoices (or receive payment) in advance of making their supply (thus triggering an actual tax point) should consider making the election referred to above for the basic tax point to be treated as the actual tax point. Examples of businesses that might make this election include suppliers of holiday accommodation, hotels, event organisers, all of whom take deposits in advance of making their supply.

 5. A supplier must issue a credit note (within 45 days of the rate change) if before the change in the rate, a VAT invoice for a supply was issued and the election referred to at 3 above has been made which has the effect of altering the output tax due.

 6. With respect to continuous supplies (for example, water, gas, power) these are treated as separately and successively supplied if all or part of the consideration is payable periodically or from time to time. Each supply of goods is deemed to be supplied on the earlier of the date when part of the consideration is received and the date when an invoice is issued in respect of the supply. The supplier can issue a VAT invoice for a period of one year or less showing the due date for each payment under the agreement. This invoice ceases to be treated as a VAT invoice in relation to any payment due and received after a change in the VAT rate. Thus a new invoice should be raised and a credit note raised for any VAT incorrectly paid.

7. With respect to services supplied which can be apportioned on the basis of either measurable work or in accordance with a pricing or costing system and the period covered by a VAT invoice spans the date of change in the VAT rate, the supply may, if the supplier wishes, be apportioned such that part might be charged at 17.5% and part at 15%. This will be relevant to businesses such as solicitors, accountants, decorators.

8. The new VAT fraction is 3/23 (being the VAT included in a gross charge at 15%)

9. Input tax will always be recovered at the rate actually charged by a supplier.

10. Subscription income – the rate is determined based on when the subscription income is received or the VAT invoice raised. Such suppliers might consider delaying raising invoices between now and 1 December 2008.

11. The standard rate of VAT shown on invoices should be amended.

12. At times when the VAT rate is increased, it may be necessary to refer to contracts to ensure that the increased rate can be charged. It is unlikely that any customer will object to a lower rate being charged.