25 Nov
Important Changes To VAT

In his Pre-Budget Report on 24 November 2008 the Chancellor announced that the standard rate of VAT will be reduced to 15% on 1st December 2008.

This means that for any sales of standard-rated goods or services that take place on or after 1 December 2008 providers should charge VAT at the new rate of 15%.

Only standard-rated sales are affected. There are no changes to sales that are zero-rated or reduced-rated for VAT. Similarly, there are no changes to the VAT exemptions.

The 15% rate will remain until 31st December 2009, and from 1st January 2010 it will revert back to 17.5%.

Most (but not all) of the Flat Rate percentage rates have been reduced from 1st December 2008, but generally not by the full 2.5% (see below for more information on the Flat Rate Scheme).

The old rate of VAT will still apply to invoices issued in December 2008 where goods were supplied more than 14 days before the invoice date. The old rate also applies if payment was made in advance before 1st December. Credit notes against old invoices will need to apply the original VAT rate, not the new one.  Please note this when you produce sales invoices or credit notes over the coming weeks.

What do I have to do?

For any sales of standard-rated goods or services that take place on or after 1st December 2008 you should charge VAT at the new rate of 15%. This means that cash businesses which currently calculate their VAT using the VAT fraction of 7/47 should, from 1st December, use the new VAT fraction of 3/23.

What VAT can I claim back on my business purchases?

The general rule is that you claim back the VAT you have been charged by your supplier in the normal way. You will still be receiving invoices after 1st December 2008 showing 17.5% VAT - that will be expected - as these will be invoices relating to purchases you have made before the rate change. In these cases you can claim back the 17.5% VAT.

The Cash Accounting and Annual Accounting Schemes remain unchanged. However, the Flat Rate Scheme percentages are changing to reflect the new rate of VAT. If you are on the Flat Rate Scheme please refer to the additional information (below). You will need to use the new rates for your sector from 1st December 2008.

Flat Rate Scheme

Will the rate change affect my flat rate percentage?

Yes. The table of flat rates has been changed to reflect the new rate of VAT. The new table is set out below. You should make sure you use the new rate for your sector from 1st December 2008.

My flat rate has not been reduced. Why not?

The flat rate percentages are calculated by reference to the VAT actually paid in each sector and, following the change to the standard rate of VAT, most sectors will find that their flat rates are reduced. However, there are a small number of sectors that, with VAT at 17.5%, would have needed an increase in order to reflect the correct underlying rate for that sector. Following the rate change to 15%, those sectors have been left unchanged rather than increased.

I want to leave the scheme because of these changes. What should I do?

Usually HMRC would expect you to leave the scheme at the end of an accounting period. You can leave the scheme at any time, but this might mean you having to perform different calculations to determine your VAT liability. If you wish to leave the scheme because of these changes, please contact Mazuma and we shall write and tell HMRC, who will then confirm in writing the date you left the scheme.

Table of New Flat Rates

Category of business

Appropriate percentage

Accountancy or book-keeping

11.5

Advertising

8.5

Agricultural services

7

Any other activity not listed elsewhere

9

Architect, civil and structural engineer or surveyor

11

Boarding or care of animals

9.5

Business services that are not listed elsewhere

9.5

Catering services including restaurants and takeaways

10.5

Computer and IT consultancy or data processing

11.5

Computer repair services

10

Dealing in waste or scrap

8.5

Entertainment or journalism

9.5

Estate agency or property management services

9.5

Farming or agriculture that is not listed elsewhere

5.5

Film, radio, television or video production

9.5

Financial services

10.5

Forestry or fishing

8

General building or construction services*

7.5

Hairdressing or other beauty treatment services

10.5

Hiring or renting goods

7.5

Hotel or accommodation

8.5

Investigation or security

9

Labour-only building or construction services*

11.5

Laundry or dry-cleaning services

9.5

Lawyer or legal services

12

Library, archive, museum or other cultural activity

7.5

Management consultancy

11

Manufacturing that is not listed elsewhere

7.5

Manufacturing fabricated metal products

8.5

Manufacturing food

7

Manufacturing yarn, textiles or clothing

7.5

Membership organisation

5.5

Mining or quarrying

8

Packaging

7.5

Photography

8.5

Post offices

2

Printing

6.5

Publishing

8.5

Pubs

5.5

Real estate activity not listed elsewhere

11

Repairing personal or household goods

7.5

Repairing vehicles

6.5

Retailing food, confectionary, tobacco, newspapers or children's clothing

2

If you have any further questions please refer to the Mazuma Tax Centre for more information or visit HMRC here.  If Mazuma performs your bookkeeping, we shall make the necessary new calculations when preparing your VAT return as normal.

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