Preparing for 1 January 2010

On Friday 1 January 2010, the VAT rate for standard-rated goods and services changes back to 17.5% from the temporary rate of 15%. This posting summarises the general principles you’ll need to consider, especially as apply to your financial systems.

Whilst there are similarities to the reduction in rate in December 2008, the increase does raise some new practical issues. Errors could be costly.

How and when you change the rate therefore needs careful consideration. In many cases you will only need to make a configuration change to your software. But in some cases you will require a change or upgrade to your software, especially if you trade with other EC countries due to other rule changes on 1 January.

Advice from HMRC on the tax rules is given at http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-changes.htm . Detailed advice is given at http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-rise-guidance.pdf . If you are unclear or uncertain about specific situations, advice should be sought from HMRC or your professional advisors.

The key points are:

1. SALES

• You will need to charge 17.5% on standard-rated supplies made on or after 1 January.
  
• If you have received a cash deposit prior to 1 January, you provide continuous services, or the sale / service in some way spans that date, consult the HMRC advice above.


• Pricing, pricelists, terms and conditions, and quotation systems will need amendment as appropriate.
  
• VAT-inclusive prices will need to rise by 2.17% (=1.175/1.15), rather than 2.5%, if you simply want to pass the increase on to customers.
  
• Retailers and etailers who account for a proportion of VAT-inclusive sales as VAT will need to account for 7/47 (=0.175/1.175) on sales from 1 January
  
• For sales invoices, if VAT is added at 15% in error, HMRC suggests a credit note needs to be issued and a new correct invoice raised at 17.5%. If it is not practical to recover the extra VAT, this will cost you some 2% of your revenue, depending on how the situation can be best resolved.
  
• Credit notes should be issued at 15% when applying to earlier invoices raised (correctly) at 15%. The same applies to cash refunds and bad debt relief, where the sale was originally at 15%.
  
• Special rules apply to certain businesses and the VAT accounting schemes such as cash accounting. Check HMRC's guiidance above to see which apply to you.
  
  

2. PURCHASES AND EXPENSES

• In early 2010, you’ll be receiving a mixture of invoices at 15% and 17.5%. Ordinarily you will claim the amount on the invoice.
  
• For till receipts where the amount or the rate of VAT is not specified, VAT should be claimed at only 3/23 on those dated up to 31 December 2009, and 7/47 thereafter.
  

3. VAT RATES ON YOUR FINANCIAL SYSTEMS

• In some systems you can enter the rate that will apply for specific date ranges. Otherwise there are usually two ways of adjusting the VAT rate on a financial transaction system:
  (a) Changing the rate against the existing 15% VAT code
  (b) Using a different VAT code.
  Each method has pros and cons. Advice should be sought from your software supplier as to how and when the change should be made. This advice may have changed since the introduction of the 15% rate, and will depend on how the 15% rate was implemented on your system.
  
• Where uninvoiced or invoiced sales are passed from one system to another, the right approach will need particularly careful attention.
  
• If you are using web-based/hosted financial software, check whether you or the host will be making the relevant changes, and that the changes will be made appropriately at the right time
  
• Watch out for sales orders entered in 2009 that are not supplied until 2010, to ensure the 17.5% rate will apply. Your software supplier may need to provide you with a software utility to automate this process.
  
• For recurrent charges, check what needs to happen for sales invoices, direct debits, etc. Likewise what will happen to costs set up as recurrent.
  
• For 24x7 online webshops, the method and timing of making the VAT rate change will need particularly careful consideration
  
• Watch out in 2010 for the other special situations mentioned above, such as raising credit notes against 2009 invoices, and claiming VAT on 2009 purchases (including staff expenses systems)
  
• Check that VAT reports show the correct VAT amount for transactions before and after 1 January. If necessary manual adjustments will need to be made to VAT reports used for VAT returns.
  
• For businesses trading with other EU countries, the rules for VAT on the supply for services is changing from 1 January, as is the format, content and frequency of the EU sales list. You may need a software upgrade.
  

4. MANAGEMENT REPORTING

• Many management reports will be unaffected by the rate change, but all should be checked for any VAT rate implications
  
• In particular any reports, such as spreadsheets, that back-calculate revenues and costs from VAT-inclusive figures will need a different rate for different time periods.
  

5. FORECASTING

• Likewise cash flow and other forecasts that span the forthcoming year-end should ideally have two different VAT rates
  

Further notes written for the rate change to 15% in December 2008 are given in the 2008 postings below.

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