The new rules on VAT

Significant changes to the Value Added Tax (VAT) regime start to take effect in early 2010. While the standard rate of VAT reverts to 17.5%, HM Revenue and Customs (HMRC) is also introducing the first in a series of changes to the rules on cross-border VAT. In addition, from April 2010 the Government will begin the process of phasing out paper VAT returns.

Here we outline some of the key measures that could affect you and your business.

VAT reverts to 17.5%

On 31 December 2009, the temporary reduction in the standard rate of VAT came to an end. The reduction from 17.5% to 15% was introduced on 1 December 2008, with the aim of boosting consumer spending during the economic downturn.

Applying the new rate

The rate of VAT that businesses charge depends on the date that goods or services are supplied. For VAT purposes this is the date that goods physically change hands (or a service is completed); or payment is received; or an invoice is issued – whichever is the earliest. The rules are modified in certain situations, including when there is a change in the standard rate of VAT.

For any sales of standard-rated goods or services that take place on or after 1 January 2010 businesses should charge VAT at the newly reinstated rate of 17.5%. This means that businesses currently calculating their VAT using the VAT fraction of 3/23 should use the new fraction of 7/47 from 1 January 2010.

Implications for retailers

For businesses such as retailers and restaurants, which principally make cash sales to customers not registered for VAT, the new rate will apply to all takings received on or after 1 January 2010, (although for certain businesses including pubs, restaurants, clubs and telephone companies, the 15% rate applied until 6am on 1 January.)

The main exception to this rule is where a customer pays for something they have taken away (or the supplier has delivered) before 1 January 2010. In this case, the sale took place before 1 January 2010 and VAT must be accounted for at the rate of 15%. Electronic tills, especially those set up to provide VAT information, will also need to be adjusted.

Anti-forestalling legislation

Anti-forestalling legislation was introduced to counter attempts to issue invoices or receive payments before 1 January 2010, even though delivery of goods or services is not due to take place until after 31 December 2009. This involved the imposition of a supplementary VAT charge of 2.5%. However, there were certain conditions under which the supplementary charge did not apply.

Cross-border supplies

A significant reform of the rules on cross-border supplies of services was announced in the 2009 Budget. The measures are intended to modernise and simplify the current system, improve the recovery of VAT on purchases made in other EU countries, and help to counter VAT fraud.

The key changes taking effect from 1 January 2010 are outlined below.

Place of Supply Rules — most services provided to business customers will now be treated as supplied in the country where the business customer, not the supplier, is established.

Time of Supply Rules — the time of supply will be governed primarily by when a service is performed rather than paid for, with a distinction made between single and continuous supplies.

EC Sales Lists (ESLs) — ESLs are now required for businesses that supply services to which a reverse charge applies in the customer’s Member State. Businesses supplying goods may need to prepare monthly rather than quarterly ESLs, where the value exceeds certain thresholds. New timescales will also apply.

New online refund procedure — all claims for cross-border refunds will be dealt with via a new electronic system.

Compulsory online filing

From 1 April 2010, HMRC will begin the process of phasing out paper VAT returns. For businesses with an annual turnover of more than £100,000 (excluding VAT), returns will need to be filed online and payments made electronically, for accounting periods beginning on or after 1 April 2010.

For businesses with an effective VAT registration date on or after 1 April 2010, filing must be completed online, regardless of turnover. The remaining VAT registered businesses may continue to file paper returns for the time being, but it is anticipated that all VAT returns will be filed online by 2012.

If you have any queries or concerns regarding the changes to the VAT regime, or would like more information on any of the matters raised here, please contact us.