VAT Rate Change Issues
December 2010
The definitive explanation of the VAT changes can be found at:
http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-rise-guidance.pdf
There are two ways to implement a VAT rate change in Diamond. The first is to use an alternative VAT code for the new 20% rate and switch from the old to the new to effect the change. The second is to simply change the rate of the existing default VAT code from 17.5% to 20%.
Whichever method you use, you must ensure that UK sales made prior to 4th January 2011 are processed at 17.5% VAT and those sales that occur on or after 4th January 2011 are processed reflecting a 20% rate of VAT.
Our advice to Diamond users is to read the letter that they will have received from HMRC and then decide on which course of action they wish to take. The first option will maintain a separate summary of transactions at each rate of VAT, which will be useful if your VAT quarter spans the change of rate. The second option is quicker and easier to do. The choice is yours.
Option 1: Use an alternative VAT code for the 20% rate from 4th January 2011
- Select an unused VAT code, say VAT code 3, for the 20% rate leaving VAT code 1 as 17.5%. This assumes that you use VAT code 1 for the standard rate of VAT.
- Continue to use VAT code 1 until the changeover date and then carry out the following actions:
- Check the default Sales VAT code in Sales Ledger parameters and change to VAT code 3 if your usual supplies are subject to the standard rate of VAT.
- Check the default Purchase VAT code in Purchase Ledger parameters and change to VAT code 3 if your usual purchases are subject to the standard rate of VAT.
- If you have default VAT codes for individual Sales and Purchase Ledger Accounts, ensure that any that are VAT code 1 are changed to VAT code 3. You need do this only for those that currently have default VAT code 1, although in fact the default VAT code should be left blank for a Customer/Supplier that is usually subject to the standard rate of VAT, as in transactions they will then assume the underlying Ledger default VAT code (You might want to change this now). You need do nothing for those that have a different default VAT code, such as zero rated or exempt or no default at all.
- If you use the Product or Stock file, change the default VAT code (V/C) from 1 to 3 for any Product, Service or Assembly that has default VAT code 1. You need do this only for those that currently have default VAT code 1, although in fact the default VAT code should be left blank for a Product, Service or Assembly that is usually subject to the standard rate of VAT, as in transactions they will then assume the underlying Ledger, Customer or Supplier account default VAT code (You might want to change this now). Again, do nothing for those that have a different default such as zero rated, exempt or no default at all.
- Amend any open Sales Orders for standard-rated supplies to be delivered and invoiced after 4th January 2011 to VAT code 3.
- Amend any open Purchase Orders for standard-rated supplies to be received and invoiced after 4th January 2011 to VAT code 3.
- Check the Default Cash Book VAT code in the Nominal Ledger parameters and change if necessary.
- Finally, check your Stationery designs to ensure that any fixed-text fields that reference the rate of VAT are amended accordingly.
Notes:
- This method provides separate VAT Code Summary for 17.5% and 20% rate
- Any subsequent Credit Notes can be issued at the original VAT rate by selecting VAT code 1
- Note that your standard rate of VAT is now VAT code 3
- When all 17.5% transactions have been completed, you may wish to move the standard 20% rate to VAT code 1
Option 2: Change existing default VAT code to 20% and use a different VAT code for 17.5%
- Continue as normal until the changeover date and then carry out the following actions:
- Change the rate of your current default, e.g. VAT code 1, from 17.5% to 20%
- Select an unused VAT code, sat VAT code 3, and use this for 17.5%
- Check your Stationery designs to ensure that any fixed-text fields that reference the rate of VAT are amended accordingly.
Notes:
- Although requiring less work initially, the VAT Code Summary will contain a mixture of both VAT rates
- Any subsequent Credit Notes can be issued at the original VAT rate by selecting VAT code 3