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VAT & the Pre-Budget Report

The two big changes affecting VAT from 1 January 2010 were already announced. The Chancellor did take the opportunity to confirm that the reduction in the standard rate of VAT rate was indeed temporary and VAT will revert to a rate of 17.5% from 1 January.

(The other big change affects the treatment of services supplied across borders; and reporting of both goods and services supplied within the EU. See below.)

VAT rate increase

So what did the reduction achieve?

We’ve seen conflicting reports by economists as to the stimulus effects. But surveys by both PricewaterhouseCoopers and the Federation of Small Businesses have suggested that the rate cut had little impact on customer behaviour. In PwC’s survey of 2,000 consumers during the summer, 88% of respondents said that the VAT cut had not prompted them to spend more on goods or services, adding that reduction in income and economic uncertainty were much more significant influences on their spending.

What we can say is the reduction and subsequent reversion to 17.5% led to significant costs for businesses in changing systems, prices, and catalogues. Despite the Government’s need for revenue, it is to be hoped that the VAT rate will remain stable for a while. Further increases in the rate of VAT post the General Election are possible, however, as 17.5% is still, by EU standards, a low rate of VAT.

We’ve put together some answers to frequently asked questions about the implementation of the VAT rate change, available here

Otherwise, the pre-Budget Report was fairly quiet on the VAT front. HMRC have revised the table of percentages for the flat rate scheme, taking account of both the change in standard-rate and new data, with effect from 1 January 2010.

Cross Border Trade

1 January 2010 also sees the first tranche of a package of changes affecting VAT and cross-border trade.

Place of supply of services

VAT has a concept of “place of supply” which governs which country’s VAT is due. These rules are changing, particularly for business-to-business (“B2B”) transactions. The general rule for B2B transactions will be that VAT needs to be accounted for where the customer is located (typically the customer will account for the VAT under the “reverse charge” mechanism). The general rule for business-to-customer transactions will remain that VAT is accounted for where the supplier is established. As now, there will be some exceptions to the general rules.

EC Sales List (ESL) for services

UK VAT registered businesses that supply services to VAT registered businesses in other EU countries, where the place of supply is the customer’s country, will have to complete ESLs for each calendar quarter and submit these within 14 days for paper returns and 21 days for electronic returns.

To complete ESL’s you will need, among other things, to report your customers’ VAT Registration Numbers and will therefore need to record these.

EC Sales Lists for goods

UK VAT registered businesses that supply goods to other VAT registered businesses in other EU countries already submit ESLs. From 1 January 2010 new rules will:

• reduce the time available to submit ESLs in line with the limits above
• as an anti-fraud measure, require the monthly submission of ESLs where the value of the supplies of intra-Community goods (excluding VAT) exceeds £70,000 in the current quarter, or any of the previous four quarters. This threshold will be reduced to £35,000 (excluding VAT) with effect from 1 January 2012.

Refunds of VAT suffered in other member states

From 1 January 2010 claims will initially be submitted electronically to HMRC who will face vet the claims before passing them on to the relevant member state. This is designed to simplify and speed up the claim process.

If you would like to discuss either the above, or any other VAT issues with an experienced, commercially focussed VAT adviser, please contact Steve Chamberlain or Julian Borley of our VAT department.