Temporary change to the standard rate of VAT
The standard rate of VAT is currently 23% but will be reduced to 21% for a period of six months from 1 September 2020. This welcome change is part of the stimulus package to maintain economic activity and support business and employment.
- Business suppliers and customers should consider how this change will affect profitability, costs and or cashflow.
- For suppliers (or customers if reverse charge applies) charging VAT at the standard rate, changes to VAT systems will be required by 1 September 2020 so that VAT obligations are dealt with and customers receive the correct VAT documentation including invoices and credit notes.
Systems and processes
- You should review systems and processes to ensure that the correct standard rate of VAT is applied from 1 September 2020 and to ensure that VAT documentation including invoices and credit notes are correct.
- Where a “reverse charge” applies, e.g. certain business to business (“B2B”) supplies then system and process changes should be considered by the customer.
Profitability / cost base / cashflow
- You should consider how the change will impact profitability, cost base, and or cashflow.
- This change introduces the potential for a cost saving for the customer or enhancement to profitability for suppliers depending on whether pricing of goods and services remains static during the VAT rate change.
- For example an exempt tenant who cannot recover VAT charged at 23% on rents will be better off after the VAT reduction where rent is priced in the lease on a net of VAT basis with VAT charged on that amount.
- For existing and future contracts consider if goods and services are on an “inclusive” or “plus VAT” basis.
VAT exempt businesses
- Where businesses are not in a position to recover VAT on costs or are only entitled to partial recovery the reduction in the standard rate of VAT should represent a cost saving.
- Such businesses may wish to consider the impact of the VAT change early and take account of this in negotiating both pricing and timing of expenditure on goods and services.
Timing of invoices, supplies and payments
- The timing of when goods and services are supplied, invoiced and paid for should be reviewed in considering the VAT rate reduction to determine the VAT rate, invoicing and credit note requirements.
- Suppliers on the invoice basis making supplies to other VAT registered persons will charge VAT at the rate prevailing by reference to the timing of the issue or obligation to issue (whichever is earlier) the invoice.
- Suppliers on the invoice basis making supplies to unregistered persons will charge VAT based on the rate of VAT applicable at the time of the supply.
- Suppliers who are the monies received basis of VAT will apply the VAT rate applicable at the time of the supply.
- Where advance payments are received but goods or services are supplied at a later date the VAT rate applicable depends of whether the supplier is on the invoice basis or on the monies received basis for VAT purposes.
- Suppliers receiving advance payments and who operate the invoice basis should account for VAT by reference to the rate in force at the time the invoice is issued or ought to have been issued whichever is earlier.
- Suppliers receiving advance payments and who operate the monies received basis should account for VAT at the rate in force when the payment is received.
These changes only apply in the case of standard rate supplies of goods or services. Supplies at the other rates including the 13.5% rate of VAT are not affected.