Impact on reporting

If you've changed the VAT rate in a system by over-typing, as distinct from setting up a new rate, there's a key risk. VAT figures and associated revenue and costs prior to 1 December could get re-calculated.

Worth checking - what impact has there been in:

1. VAT reporting in core transaction system(s)?
2. Reporting in spreadsheets and other user-written systems?

One week on

Now the new 15% standard rate of VAT has been in place for a week, what does a business need to do?:

1. Have all transactional accounting systems been updated, such as invoicing, order processing, tills, staff expenses and accounts payable systems?
2. Have all reporting and planning systems been updated?
3. Have VAT-inclusive prices been adjusted, or otherwise dealt with, wherever they appear?
4. Have existing orders, recurrent sales invoices and recurrent costs been adjusted?
5. Have orders and services paid for but not supplied in full by 30 November been identified and addressed?
6. Have items supplied before 1 December but not invoiced been identified and addressed? Likewise cash receipts not receipted?
7. As a supplier: Have any invoices (as distinct from till receipts) been produced at 17.5% when they should be at 15%? A credit note for the difference should be produced and sent to the customer. Otherwise the full 17.5% will need to be paid over to HMRC.
8. As a customer: Have you spotted supplier invoices with 17.5% VAT that should have been with 15%? HMRC suggests requesting a credit note in each case and only claiming the 15%. If the error isn't spotted, then HMRC will usually accept a claim for the VAT amount on the invoice.
9. But till receipts issued on or after 1 December should only have VAT claimed at 3/23 (15/115) of the total amount paid for standard-rated items, regardless of what is detailed on the receipt.

Further details below.

VAT on supplier invoices - processing incorrect VAT

Over the next few days and weeks, businesses will receive invoices with a mixture of 17.5% and 15% VAT. In general the VAT amount analysed on the supplier's invoice should be recorded, to match the supplier's record of invoices raised .

But what if you spot that 17.5% has been charged when only 15% is appropriate?

HMRC have said:

1. Only 15% should be claimed as input tax. You may ask your supplier to provide you with a credit note for the over charged VAT.
2. But when auditing businesses, they will usually accept a claim of 17.5% as they "will assume that the supplier has followed the accounting documents unless there is good reason to suppose otherwise "
   

Pending receipt of a requested credit note, one option is for the customer to record a dummy credit note to reduce the amount claimable, and reduce the amount payable to the supplier. This can be reversed if the original invoice is found to be correct.

Likewise if a supplier notices that invoices were raised at 17.5% which should have been 15%, they should raise a credit note and notify their customer. Otherwise the full 17.5% should be accounted to HMRC as output tax.

Clearly it is in everyone's interests to avoid such problems. It's worth raising invoices right first time.

Existing sales orders and recurrent invoices

When using a system to add products or services onto a sales order or recurrent invoice, the VAT code and possibly applicable VAT rate are often recorded automatically ready for invoicing.

For sales orders and recurrent invoices set up prior to 1 December, this can result in subsequent invoices being raised with VAT of 17.5% instead of 15%.

Depending on how the system works, and whether a new VAT code has been set up for the new rate, you may need to adjust un-invoiced sales orders and recurrent invoices set up prior to 1 December.

Sales spanning 1 December

HMRC have published new guidance, including further detail on sales that span 1 December. See http://www.hmrc.gov.uk/pbr2008/measure1.htm

Key points:

(1) Will you be invoicing in December for goods and services provided (or cash received) before 1 December?

There are specific rules, including an extention from 14 to 30 days for certain invoices.

(2) Did you invoice or receive cash for products or services that hadn't been supplied in full by 30 November?

In this case you can optionally refund the change in VAT, often just by issuing a credit note.

Where you supply "continuous services" such as maintenance or membership that have been prepaid or invoiced in advance, the relevant portion of the VAT can be optionally refunded.

(3) Do you provide services under quarterly or monthly instalments?

If these qualify as "continuous services", instalments on or after 1 December should be at the new rate of 15%. Recurrent invoices and direct debits should be changed.

Items dated 1 December may well be incorrect, and require adjustment.

(4) When you claim VAT on till receipts issued on or after 1 December, this should be at 3/23 of the VAT-inclusive value of relevant items regardless of the VAT amount shown on the receipt. This is because HMRC acknowledge that not all retailers will have been able to adjust their tills by 1 December.

You can continue to claim 7/47 on receipts dated prior to 1 December.

Are you using hosted accounting software?

Are you using software for accounting, ecommerce or a webshop that is hosted remotely?

The change in the VAT rate may be being made by the hosting company, in which case when? But it may be a system parameter that you need to amend youself.

Best to check with your hosting provider.

How can the new rate of VAT be handled in shops and webshops?

Re-pricing a whole product range in a shop or web shop can be a major and costly exercise. One approach is to continue to price at 17.5%, but set up a discount code on the tills or webshop that can be applied to every sale. The discount rate is around 2.1%, not 2.5% (* see below).

On web sites the discount is often known as a "promotional code".

Currys have implemented this approach immediately, before 1 December, effectively passing on the VAT reduction at their own expense for the next few days.

Re-pricing and re-labelling can then be done at a time of the retailer's choice.

But care needs to be taken where a shop provides items that are not all standard rated.

* The discount to be applied is (117.5-115)/117.5 x 100% = 2.128%

How should the master VAT rate be changed in a system?

As mentioned in a previous post, there can be more than one way to implement the change in standard rate in a system, where multiple rates are allowed.

Sage have announced the following recommendations for their Line 50 / Sage 50 software:

1. The master rate (usually T1) should be changed to 15% for 1 December to avoid problems with system defaults
2. A new rate code (say T3) should be set up for 17.5% to handle raising credits for pre-December sales, if required
3. Supplier invoices that are standard-rated should be entered as T1, and the calculated VAT amount over-typed to match the invoice
4. Other detailed advice, especially where cash accounting is being used

This is likely to be the general approach in many systems large and small, but is worth checking with the software provider.

What systems will be affected?

Various types of financial systems will be affected, including:

1. Sales and ledger systems that calculate VAT from a base price will need the rate changed. Various transition issues will need to be addressed. See notes in previous post.
2. Sales and purchasing systems that have VAT-inclusive prices will need to be adjusted
3. Quotation and purchasing systems may need the Ts&Cs adjusted
4. Employee expense systems that back-calculate VAT from VAT-inclusive figures will need to handle expenses incurred either side of 1 December
5. Forecasting systems will need to apply different rates of VAT at different times

The systems you use will likely include a mixture of packaged software, spreadsheets and other internally-developed systems. The changes needed for each one will need to be evaluated, and actioned swiftly.

How do I handle the VAT rate change in my systems?

From 1 December 2008, the UK's standard rate of VAT will change to 15%. It will revert back to 17.5% just over a year later, on 1 January 2010.

It has been well over fifteen years since the standard rate was last changed. Modern systems simply haven't had to handle this, and some will be better designed than others to cope.

The official VAT guidance is at
http://www.hmrc.gov.uk/pbr2008/measure1.htm

Whilst the change will apply immediately on each date, there are a number of circumstances where the old VAT rate will continue to apply:

1. Refunds and credit notes should be made at the same VAT rate as originally charged
2. In certain sales situations where cash receipt, delivery and/or invoicing don't all take place on the same side of the change date
3. Supplier invoices need to be recorded according to the VAT actually charged

Therefore in practice there will be a transition period after each change when two standard rates will be in use for sales and purchases.

In most cases the standard rate in a system will be changed to 15% on 1 December, and later back to 17.5%. But for systems that allow multiple VAT rates, it's worth checking whether it would be better to set up a new 15% rate, and keep the old standard rate unchanged.

In any case, end-users need to be advised how to handle transition arrangements.