VAT changes in 2010

Whatever the size of your business, you are likely to be affected by significant changes in VAT across the EU from 1 January 2010. The changes will apply to supplies of services between member states and the filing of VAT returns in the UK.

A return to 17.5%

The VAT rate will revert to 17.5% for supplies with a tax point on or after 1 January 2010. HMRC is introducing two measures to ensure businesses do not abuse their position by invoicing or paying for supplies in advance:

• a 2.5% supplementary charge for supplies where:
  • the customer is unable to recover all the VAT on the supply and the transaction is between connected parties 
  • the supplier finances the supply for a period of time
  • an invoice is raised but payment is not due for more than six months.

This measure came into retrospective effect on 25 November 2008.

• a 2.5% supplementary charge for prepayments made before the rate rise - for supplies of over £100,000 to be made after the rate rise. The exception is where such prepayment is normal commercial practice. This measure applies to payments made on or after 31 March 2009.

 E-filing of returns

From 1 April 2010 it will be mandatory for businesses with a turnover of £100,000 or more to file VAT returns electronically. Failure to comply will incur a penalty of up to £400, depending on turnover.

Businesses must use either HMRC-approved software or HMRC's website "gateway" to submit returns, or the services of an authorised agent to submit returns on their behalf.

Payment must also be made electronically by BACS, CHAPS, bank giro credit or direct debit. Businesses using these facilities will be allowed an extra seven days to submit the return and payment. The exception is payment by direct debit, which will be collected a further three days after that.

Place and time of supply

The basic ‘place of supply' rule for business-to-business transactions will change from 1 January 2010. The current rule deems the ‘place' to be where the supplier is located. The new rule has it as where the customer belongs for most services.

The change means a much greater range of imported services will be subject to the reverse charge mechanism (where the recipient of a service from another member state or from outside the EU accounts for VAT due through its own VAT return). This will affect banks and insurance companies using offshore call centres and backroom administration providers. Management charges will also be subject to the reverse charge.

Also from 1 January 2010, businesses will have to account for VAT under the reverse charge rule either at the time of supply or when payment is made, whichever is earlier. Special rules will apply for continuous supplies of services, such as leasing charges.

EC sales lists

In a move to control supplies between European Community countries and reduce fraud, EC sales lists (ESLs) are being extended to cover the supply of services subject to the reverse charge, from 1 January 2010.

ESLs already exist for supplies of goods amounting to over £11,000 in a 12-month period. The supplier submits a list of the value of the goods by customer VAT registration number and country identification code. Businesses will also have less time to submit an ESL than previously.

These changes could have serious systems implications for your business. You will need to distinguish between the various tax point requirements, bearing in mind tax point rules for UK supplies remain the same. You will also need to know the tax treatment of supplies in your customers' country - to determine if the reverse charge applies.

For further advice on how the 2010 VAT changes will affect your business, please speak to your usual Littlejohn tax adviser or email VAT partner Bob Jones rjones@littlejohnllp.com