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Change in VAT Rate: service businesses
HMRC will be writing to all registered traders with guidance on the change of rate. Guidance is also available online at www.hmrc.gov.uk/pbr2008/measure1. This note is intended to supplement but not to replace that advice by highlighting particular issues for service businesses.
The new VAT rate of 15% should be applied to all supplies for which the “VAT point” falls on or after 1 December 2008.
The “VAT point” for the supply of a service is normally the date the service is performed. This is normally taken to be the date when all the work except the invoicing is completed. Example: a solicitor is instructed on 1 November to prepare a will. This involves work in the course of November and December with the work being completed in late December. VAT should be charged at 15%.
Where you have received interim payments before 1 December for work which is completed on or after that date any VAT already charged at 17.5% on the interim payments can be recalculated at 15% and the difference repaid to the client. You have a free choice whether to do this or to leave it at 17.5%. Normally of course you would not want to make any retrospective change unless your client is unable to recover the VAT. But you are able to make this adjustment only if you complete the work and issue a credit note reducing the VAT rate to 15% by 13 January 2009.
If a VAT invoice is issued up to 14 days after the service is performed, the “VAT point” is moved forward from the date the service is performed to the date the VAT invoice is issued. Example: a solicitor is instructed on 1 October to draw up a trust. He works on the matter in October and November and the work is completed by 20 November. If he issues a VAT invoice before 1 December VAT will be due at 17.5%. If he issues a VAT invoice on or before 4 December VAT will be due at 15%. But if he issues a VAT invoice after 4 December the original VAT point of 20 November revives and VAT will be due at 17.5%.
Some service businesses are making “continuous supplies of services” and a different set of rules apply. In those cases, the VAT point is not the time the service is performed. Instead it is the earlier of the time that payment is received and the time a VAT invoice is issued. For businesses of this kind, the new 15% rate will apply to a supply if both the payment and the issue of the invoice take place on or after 1 December. However, to the extent that service covered by a tax point (i.e. VAT invoice or receipt) falling before 1 December are actually performed on or after 1 December you can to that extent recalculate the VAT at 15%. For example, a business consultant invoices quarterly in advance for rendering advisory services to his client. He issues a VAT invoice on 1 November (paid on 15 November) for £9,000 + VAT at 17.5% covering the three months to 31 January 2009. He may if he wishes recalculate the VAT at 15% on £6,000 of his charge (being the part attributable to services to be performed after 1 December), leaving the other £3,000 charged at 17.5%.
Where you issue a credit note in respect of a supply which you made before 1 December which adjusts the charge which you make for the supply, you must apply VAT at the same rate as that which applied to the original VAT invoice. For example, an architect issues a VAT invoice in October 2008 for £10,000 + VAT at 17.5% in respect of work completed in September 2008. The client disputes the fee and the architect agrees to reduce the fee to £8,000 + VAT, issuing a credit note in January 2009. The credit note must be for £2,000 + VAT at 17.5% despite being issued after 1 December 2008.
The good news is that HMRC say that they will be operating a “light touch” if they find “change of rate” errors in the first VAT return after 1 December. Specifically, they will not seek any adjustment in relation to such errors “unless we have reason to suppose that there is an overall revenue loss”. What this means is that if supplies are made at the wrong rate between fully taxable businesses, so that the supplier charges the wrong rate of VAT and the client recovers the wrong rate of VAT, HMRC will make no adjustment. But if you charge too little VAT to a client who is not able to recover VAT (such as a retail customer or a VAT-exempt business) an adjustment will in principle be made.
For further guidance please contact David Landau or your usual contact partner
