There have been a number of significant recent changes affecting VAT.
a) Return of the standard VAT rate to 17.5%
You will be well aware of this change but if you use the Flat Rate Scheme (FRS) for accounting for VAT, the FRS percentages have increased. For the new rates please click here.
Note that if you used to apply the percentage applicable to the sector headed “Other services not listed elsewhere”, this sector has now been combined with the sector headed “Business services that are not listed elsewhere”. This means a higher FRS rate now applies - the FRS rate applicable to the sector headed “Business services that are not listed elsewhere” is now 10.5%.
There are some unusual and specific cases where you can still legally charge 15% VAT on sales invoices raised after 1 January 2010. If you are unsure which rate of VAT applies on a transaction after 1 January 2010, please contact email@example.com.
b) If you supply services to a business based overseas
From 1 January, the place of supply for cross-border services to business customers (business to business or B2B) is now deemed to be in the country of the customer. The new rules do not change VAT issues for sales to non-business overseas customers (business to customers or B2C).
The main consequence of this change is that if, from 1 January this year, you supply services to a business customer based in the EC, you must now report the sale quarterly to HMRC. The report you need to send HMRC is known as an “EC Sales List”. The EC Sales List has been in place for many years in relation to the sale of goods to EU business customers and the same form will be used for services after 1 January. Some key points about this EC Sales List are:
(i) You must report on a calendar quarter basis. This is regardless of your business’ actual VAT stagger period/when your actual VAT return periods end.
(ii) It can be completed in paper format (14- day deadline from the end of the calendar quarters) or online (a 21-day deadline).
(iii) The same return can be completed if a business has supplied goods as well as services to an EC business customer – a code “3” entry is made for services.
The second main consequence if you buy services from suppliers in other countries is that you may have to account for the VAT yourself - depending on the circumstances. This is called the 'reverse charge'. Where it applies, you act as if you are both the supplier and the customer - you charge yourself the VAT and then, assuming that the service relates to VAT taxable supplies that you make, you also claim it back. So there's no net cost to you - the two taxes cancel each other out.
This can best be illustrated by an example. Suppose you are a business consultant and you get a business based in France to upgrade your company website – they charge you the equivalent of £1,000. Provided you supply your VAT number to the French business and this number is shown on their sales invoice to you, the French business does not need to charge you VAT. Despite this, you are required to account for output VAT of £175, being 17.5% of the net cost. You must put £175 in Box 1 on your VAT return but at the same time you can also put £175 in Box 4 of the return, thus cancelling out the VAT you otherwise would owe to HMRC. Finally, you also put the full value of the services bought in both Box 6 and Box 7.
Where we help your business with the VAT Return, and you sell services to or buy services from other businesses within the EC, we will of course guide you through this new process. From a bookkeeping point of view, you will need to be able to identify separately such acquisitions from or sales to EC businesses.
c) If your annual turnover exceeds £100,000
From 1 April 2010, if your business turnover exceeds £100,000, you will be required to file your VAT Return to HMRC online and pay any VAT due electronically. Online filing and electronic payment also apply to any business registering for VAT for the first time from 1 April 2010, regardless of size of turnover. Online filing will apply to all VAT registered businesses form April 2012 but, in any case, offers the following additional benefits over paper filing:
(i) You have an extra 7 days over and above the normal paper deadline for filing your VAT Return; and
(ii) When you pay by direct debit, you have an extra 10 days in which to pay any VAT due. If the 10th of the month falls on a weekend, the VAT due will not be taken from your bank account until the next working day.
The first step to online filing is to enrol for VAT Online services. You should do this as soon as you can. For information on how to enrol, you can go to the HMRC website.
You can also see a demonstration of how to register for VAT Online Services by clicking here.
We can supply for reference a full copy of a booklet that HMRC has been sending to businesses it has identified as exceeding the £100K turnover threshold who need to file online.
Please contact firstname.lastname@example.org if you would like to discuss any aspect of the VAT changes further.