VAT tips for 2010

1st January 2010.

Time to... clear away the champagne corks that have somehow ended up in the flowerpots after your New Year's Eve party, try and vacuum up the crisps that have been ground into your brand new carpet... and change your business's VAT rate.

On 1st December 2008 the standard VAT rate went down to 15%, and it's just about to go back to 17.5%, so how will that affect your business?

In simple terms, if you're registered for VAT and issue invoices to your customers, then you need to charge 17.5% VAT instead of 15% for any sales you make on or after 1st January 2010.

And when you receive VAT invoices from your suppliers, they should have 17.5% of VAT on them instead of 15%, and that's the amount you can claim as input VAT (subject to the normal rules for claiming back VAT - so sorry but you still can't claim back the VAT if it's for business entertaining).

But this is VAT we're talking about here and VAT is never that simple. There are "special rules" and "anti-avoidance provisions" in the equation too! And what if you're on the cash accounting scheme, or the flat rate scheme?

Let's look at the "special rules" first.

Special rules

Briefly, these say that in some circumstances you can choose whether to apply the 17.5% or 15% rate of VAT to your sales.

Here's an example.

If you start work on a job before 1st January 2010 and don't invoice for it until after that date, then strictly speaking, under the tax point rules, you'd be charging 17.5% VAT on all of that sale.

But the "special rule" says that if you choose, you can apportion the service between the work you carried out before 1st January 2010 and the work you did after that date (using a fair method, such as your daily or hourly rate), and then add 15% VAT on the pre-2010 amount and 17.5% VAT on the rest.

You may want to do this particularly if your customer can't claim back any or all of the VAT you charge them, e.g. you're a jobbing gardener pruning winter trees for a member of the public.

But do make sure the method you use to apportion your service is fair and that you could explain it to a VAT inspector if you are visited, because if your customer can't claim back all the VAT and you only charge them 15%, that represents a loss to HM Revenue and they have said they would pursue this. And trust me, you don't want HM Revenue after you.

They have, however, said that they will use a "light touch" approach to correcting errors if there's no loss to them, e.g. if you charge a customer 15% and that customer can claim back the VAT in full.

What happens if I do make a mistake and charge the wrong amount of VAT? How do I correct it?

In that case, HM Revenue say you should issue a credit note in full for the invoice with the wrong amount of VAT and issue a new invoice with the correct VAT on it.

What happens if I need to issue a credit note for an invoice that I issued before the rate change?

The invoice would have had 15% VAT on it so the credit note should also have 15% VAT, even if the credit note is issued after the rate changes.

What if I'm cash accounting for VAT, I issue an invoice with 15% VAT on it and I'm paid after 1st January 2010?

You'd still pay over the 15% VAT only, because that was what was on the invoice.

What if I'm using the VAT flat rate scheme? Will the rates change?

UPDATE:  Yes they will.  HM Revenue have now issued a .pdf document to say what the new rates are.

We've already updated FreeAgent to be ready for this change.

Will FreeAgent implement all these changes for me?

We certainly will.

You can already use 15% or 17.5% VAT on your FreeAgent invoices, credit notes, bills, expenses, etc. So you'll be able to record these correctly.

We have now programmed in the new VAT flat rates.

HM Revenue have provided both summary and detailed guidance on their website, both of which are in plain English.

Good luck with the new rate - and let's hope the Chancellor chooses a more small-business friendly way of kick-starting the economy next time :-)