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PBR 2009 - Summary of VAT changes



Sadly Steve Allen died in July 2011. His wife Leah would like to thank all those who know Steve and helped contribute to his success. She has recommends Steve's clients and anyone who is interested in this article topic to contact Rob McCann from “The Vat people” on (tel) 0161 477 6600 . Please make reference to Steve Allen.

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Please accept the PBR VAT summary below with our compliments:

1. TEMPORARY REDUCTION IN STANDARD RATE From 1 December 2008, the standard-rate of VAT will be temporarily reduced to 15% until 31 December 2009 (N.B. zero-rated and 5% reduced-rated supplies are unaffected). On 1 January 2010, the standard-rate will revert to 17.5% again. Where payment has been received or invoices issued at 17.5% prior to 1 December 2008, but the goods are not provided until after that date, suppliers may choose to issue a credit adjusting the VAT to 15%. The usual time limit for issuing such credit notes is 15 days, but this will be extended by secondary legislation to 45 days.

Anti-forestalling legislation will be introduced in the Finance Bill 2009 to prevent businesses from using artificial arrangements to obtain a 15% rate on supplies to be made after the reversion date. As a result of the reduction, legislation will be required to amend the percentages applicable to the flat rate scheme for small businesses, and there will also be revised amounts applicable to fuel scale charges. HMRC have issued a detailed guide on the issues which includes tables of the revised flat rate percentages and fuel scale charges, and can be downloaded at

2. INCREASE IN BESPOKE RETAIL SCHEME THRESHOLD From 1 April 2009, the current turnover limit of £100m beyond which retailers are not allowed to use any of the five published retail schemes (i.e. the Point of Sale Scheme, two Apportionment Schemes, and two Direct Calculation Schemes), will be raised to £130m. Businesses with turnovers above the limit must either agree a Bespoke Retail Scheme with HMRC, or use the normal VAT accounting rules.

3. SIMPLIFICATION OF ENTRY & EXIT RULES FOR THE FLAT RATE SCHEME From 1 April 2009, the current entry requirement that a business should have a total income of less than £187,500 will be removed. This will leave a solitary entry test that the taxable element of the total turnover should be less than £150,000.

With regard to leaving the scheme, there is a requirement that businesses check annually whether their income exceeds £225,000. Where this is the case, the business must leave the scheme. An amendment will now be made to the scheme rules which will allow the test to be calculated on the same basis that the entry calculation was made. For example, if entry eligibility was based on cash received, the leaving test can be based on cash received also. Likewise, if entry was based on invoices issued, then exit can be based on invoices issued too.


1. STANDARD-RATE REDUCTION Clearly, the aim of the reduction is to get consumers spending again by bringing about lower prices, particularly in the retail sector. However, given that the reduction will only reduce a £20.00 purchase to £19.58, it remains to be seen whether the hoped for rise in spending actually occurs. Individuals may be expecting a greater impact on their household budgets than is likely to be the case, as many basic day to day purchases and essentials (most foods, domestic fuel and power, children’s clothes, insurance, mortgage and credit card interest) are not subject to standard-rate VAT, and will be unaffected by the change.

(By way of a helpful calculation tool, the current 7/47ths formula for working out the VAT element of VAT inclusive amounts will become 3/23rds)

The reduction will directly affect those individuals and businesses which are unable to recover partially or fully the VAT that they incur. Assuming the rate cut is passed on, this will benefit individual consumers who will see the prices of standard-rated goods and services fall. Any businesses or organisations in the exempt and non-business sectors (e.g. financial service providers, insurers, care homes, welfare providers, nurseries, and charities) will also see a reduction in costs, as the amount of irrecoverable VAT they suffer on standard-rated goods and services decreases. However, in administrative terms, all businesses will be affected, as any change in VAT rate creates numerous accounting and systems issues. Some retail businesses, who will be under pressure to pass the rate cut on, will suffer significant administrative costs implementing price changes across multiple product lines in less than a week. The suggestion in some quarters is that a lot of smaller retailers simply won't bother to change their prices, and will pocket the small difference for themselves as an offset against falling profits. As the new rate is only 7 days away, businesses only have a very short time to amend accounting systems and, where applicable, their prices. However, as deferring the rate cut may defer consumer spending, it was no doubt felt that any further delay into the busy Christmas period would be counter productive. The last change in the standard rate of VAT was over 17 years ago when sophisticated ERP systems were in their relative infancy. It may now be a much more difficult task to re-configure systems-based processes in order to comply with the rate change by the due date. Retailers will also need to consider the impact of the change on their price point policy and how they pass on the related reduced VAT charge to their customers.

2. INCREASE IN BESPOKE RETAIL SCHEME THRESHOLD As the negotiation and agreement of a Bespoke Retail scheme can be very costly to a business in terms of time and related professional fees, the increase in the current threshold (which has remained unchanged since 2000), has to be a good thing.

3. SIMPLIFICATION OF ENTRY & EXIT RULES FOR THE FLAT RATE SCHEME In its early days, the flat rate scheme was unattractive due mainly to excessive percentages. However, subsequent rate reductions and other incentives such as the first-year 1% discount has seen the scheme become a beneficial way of simplifying the VAT accounting of small businesses. Anything that further simplifies the use of the scheme should be welcomed.

About the Author

Steve Allen is the Director of VAT Solutions (UK) Ltd, an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. Both not only are respected tax advisers, but have worked for both Customs & Excise and one of the top four accountancy firms for many years. This mean that their team know both sides of the equation and are truly experts in this field.

The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from their website

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Article Published/Sorted/Amended on Scopulus 2008-11-27 12:13:13 in Tax Articles

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