NEWS

From 1 January 2010, there will be significant changes to both VAT legislation and the way VAT is administered. Planning ahead will be crucial for these changes in order to remain compliant with the VAT rules and to avoid any penalties.

1. New place of supply rules for services

The place of supply rules are used to determine where a supply, for VAT purposes, takes place. This is important, as a supply can only be subject to UK VAT if it is supplied in the UK. If a supply is not made in the UK, no UK VAT need be applied (i.e. it is 'outside the scope' of UK VAT).

The new rules for determining the place of supply of services will take effect from 1 January 2010. The change concerns the 'basic rule' which determines the place of supply for services such as management, administrative and clerical services. At present, these services are deemed to be supplied where the supplier has established its business. Under the new basic rule, the place of supply of a service will be: where the recipient belongs, if the recipient is a business customer; or where the supplier belongs, if the recipient is not a business customer.

There will be a number of exceptions to this rule, which will alter the place of supply from that established by the basic rule. These new rules will not only be important to suppliers of services. Businesses which purchase services from outside the UK will have to account for VAT on supplies themselves, using the reverse charge mechanism. This could see increases in the amount of irrecoverable VAT incurred by partially exempt businesses.

The details of the new rules have yet to be finalised. HM Revenue and Customs are currently considering the responses to a consultation on this issue. More detailed guidance will be published in due course.

In light of these changes, all businesses are urged to review the current VAT treatment applied to supplies of services, both made and received, to ensure that the correct VAT treatment is applied.

2. EC Sales Lists for supplies of services

From 1 January 2010, it will be necessary to submit EC Sales Lists (ECSL) in respect of services supplied to businesses in other EU Member States to which the reverse charge applies. This requirement has been introduced with a view to reducing the level of VAT fraud in the EU Member States. Tax authorities hope this can be achieved through increased reporting regulations.

It was originally announced that ECSLs for services would have to be submitted on a monthly basis. However, the UK has stated that it will allow them to be submitted on a quarterly basis (i.e. ECSL accounting periods will be the three months ending March, June, September and December). However, discussions are still taking place concerning the possibility of monthly ECSLs being needed in some cases.

This requirement will result in additional record keeping being needed. Planning should begin now to ensure that systems are in place to facilitate this.

3.  Online submission of VAT returns

From 1 April 2010, it will be mandatory for all newly VAT registered businesses and VAT registered businesses with a turnover of £100,000 or more to submit VAT returns online. Any businesses not meeting these conditions can continue to submit paper returns, although this option may be phased out completely in 2012.

Submission of online returns will require businesses to register and set up online VAT accounts on the HMRC website. Returns can then be submitted online and payments of VAT, if necessary, will have to be made electronically (i.e. BACS, CHAPS, direct debit or bank giro).

This change may seem a long way off, but planning for it, such as registering online and getting used to the new system, should be done in advance to ensure a smooth transition from the existing paper based system.

4. New VAT rate

The final change to be aware of is that on 1 January 2010, the standard rate of VAT in the UK is expected to revert back to 17.5% after a 13 month period at 15%. Care will need to be taken to ensure that the right rate of VAT is charged.