Munster’s first independent VAT consultancy practice providing specialist VAT and Indirect tax advisory, assurance and interim management support services to owner managed businesses, small & medium enterprises, accountants and legal practices.

BUDGET Special: What the change in the VAT rate means for businesses

Wednesday, December 7, 2011

by Nick Ryan

The budget brought very little in changes to VAT that offered positives for growth and stability. Apart from the telegraphed increase in the standard rate to 23% with effect from 1 January 2012 only a number of minor measures were announced, perhaps the Finance Bill will have more…. reduced rate for construction services for redevelopment of commercial properties, zero rate for construction services to NPMO’s? Wishful thinking?
The minor changes are as follows:
VAT rate of district heating reduced to 13.5%
9% rate to be widened to include admissions to historic houses and gardens and admissions to “open farms”
Indication has been given that unregistered farmers will be allowed to claim a refund of VAT on the purchase of wind turbines from 1 January 2012.
Consultation process to commence in early 2012 on VRT and motor tax in order to consider how to improve revenues in both
The increase in the standard rate of VAT had been signalled and businesses will need to consider the impact of this change for the supplies they both make and receive. There will be implications for businesses operating under both the invoice basis and the cash received basis.
For businesses supplying goods/services on the invoice basis the key issue for the business is to ensure the correct VAT rate is applied, this would be the rate in force at the time the VAT invoice is issued. Consideration here should be given to businesses who issue a pro forma invoice and where payment is received after the new higher rate is in place. This could result in a business having a shortfall in the amount of VAT due and thereby needing to collect the shortfall amount as a secondary payment, think of the additional time cost and potential client relationship issues that could be involved here.Care should also be taken in issuing credit notes and ensuring the correct rate is applied.
Businesses operating on a cash receipts basis should apply the VAT rate applicable at the time a payment is received with similar care required when dealing with both advance payments and credit notes.
The rate change does not end there, for businesses it also requires an administrative cost in reviewing their VAT compliance function to ensure the rate change is applied to all products etc. it covers. Invoicing and accounting systems need to be changed to reflect the change as do cash registers and EPOS systems. It is imperative that the current rate is retained within the systems used to ensure businesses can manage credit notes and those transactions that may still be taxable at the current rate i.e. ongoing contracts entered into.
Invoicing templates and support documents will also need to be revised to provide for the new rate.
Overall the change in the rate for the Government provides them with the revenues they have estimated but for businesses it provides for both an additional eye to VAT and the administrative cost for their business.
If you have any questions on this or require assistance in implementing the rate change then please contact me.