As it is likely that there have been a number of changes to tax that will affect manufacturers in the Pre-Budget Report, Maureen Penfold, head of manufacturing at Kingston Smith LLP, discusses the impact of these in her company’s quarterly report.
VAT changes afoot
The ending of the reduction in the VAT rate on 1 January 2010 came as no surprise, given that this was always understood to be a temporary measure.
However, in addition a number of other important changes to the VAT system came into effect on the same date. These changes apply to supplies made between EU member states, and can effect the liability to VAT on cross border supplies — as well as administration of VAT compliance.
Any changes in the Pre Budget Report on 9 December 2009 will now be known, but at the time of writing were not. Nonetheless, it is almost certain that the VAT rate will have reverted to 17.5%, following the 2.5% cut in the standard rate that had been in force for the past 13 months. The original cut in the standard rate caused some confusion among businesses, and the reversion will again be an administrative headache for some.
The rate of VAT charged depends on the date when the goods or services are supplied. For VAT purposes, this means the date on which the goods physically change hands (or a service is completed) or the date an invoice is issued, or the date payment is received, whichever is the earlier. From 1 January 2010, businesses should still use the old rate of 15% if they have provided goods or services before 15 December 2009, or if they have been paid before 1 January 2010 but have not raised an invoice within 14 days.
On 1 January 2010, changes to VAT rules came into force that intended to simplify cross-border supplies of services and recovery of input tax. The change will mean that in business-to-business transactions the services are supplied where the customer is established, with the customer accounting for VAT under the reverse charge procedure. Intra EU business-to-consumer supplies will be subject to VAT in the country of the supplier as they are currently.
In addition to these changes, any business that makes supplies of services to a business customer in another EU state will need to report those supplies to HMRC, usually on a quarterly basis but they can be monthly or annual by agreement. These reports need to be made within 21 days of the quarter or month end. Business that are currently receiving services from suppliers in other EU states should consider carefully the nature of those supplies to determine whether they should be subject to VAT in the UK through the reverse charge procedure.
Likewise, any business making supplies of services to customers outside the UK should not charge UK VAT if it is on the list of supplies such as engineering. Also, they should consider whether their systems will allow the supplies to be identified sufficiently quickly and accurately for the purposes of the new reporting requirements.
EU VAT refund procedure
A new electronic VAT refund procedure has been introduced throughout the European Union (EU), with effect from 1 January 2010, and replacing the old paper-based system. UK businesses will thus need to submit any claim for VAT incurred in other EU countries on a standard form through the UK Government Gateway, rather than direct to the relevant member state. This is expected to simplify and speed up the process of obtaining cross border VAT refunds.
While the change in VAT rate is clearly the headline issue in connection with VAT, a number of other changes have occurred on 1 January 2010, or will take place in the near future. Businesses should ensure that their systems can cope with these changes.