Amid much hype and to no-one’s surprise, yesterday Alistair Darling cut the standard rate of VAT to 15% with effect from the 1 December 2008. The cut is temporary and so on 1st January 2010 the standard rate will return to 17.5%.

The 15% rate will apply to the supply of goods and services currently charged at 17.5%, the acquisition of goods from other member states, imports and the calculation of reverse charges made on or after the 1 December 2008. There are no changes to the VAT exemptions, zero rated items and those liable to VAT at the reduced rate.

It may be worth reminding readers that the date on which supplies are treated as being made for VAT purposes, and thus the date on which VAT is due, is governed by the tax point rules which are as follows:-

Basic tax points

Goods – usually the date when send the goods to the customer or the customer takes them away or the date you make them available for your customer to use.

Services – the date when the service is performed i.e. normally when all the work is completed.

Actual tax point

Date of receipt of payment
Date of invoice if issued within 14 days of the basic tax point (although on application the 14 day period can be extended to 30 days).

Basic tax points are overridden if an actual tax point occurs.

Applying the general rule, the actual tax point is the date of payment or date of invoice; whichever comes first.

If there is no actual tax point the basic tax point will apply. Standard rated supplies with a tax point occurring before the 1st December 2008 should be charged at 17.5% those after at 15%.

Other things to note

The tax point for services subject to the reverse charge is the date you pay for the services.

There are special rules for continuous supplies of services for example property rental where it should be possible to ensure VAT is charged at the reduced rate for any part of the supply provided after 1st December 2008.

Following the change in VAT rate a new VAT fraction will be required to calculate the amount of VAT included in a tax inclusive receipt or invoice. The VAT fraction for calculation of VAT charged at 15% is:-

Amount X 3/23 = VAT

Personally I doubt whether this measure will do much for the economy. Many items such as food, children’s clothing and domestic fuel are unaffected as these are taxed at either 0% of 5%. The effective reduction on what you pay will in fact only reduce by 2.1%.

A far better option in my view would be for the UK government to ask the EU to allow them to cut VAT on labour intensive industries to 5% which would make a real difference in those industries most affected by the current situation. See here for more information.

Also See:

Category: Taxation

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