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Pegasus CIS – Reduction in Standard VAT Rate to 15%
It was announced on Monday 24 November 2008 that the standard rate of UK VAT will be reduced from 17.5% to 15.0% with effect from Monday 1 December 2008.
A Business Briefing from HMRC states the following: "You should use the new rate for all VAT invoices that you issue on or after 1 December 2008",except for where:
- You provided goods or services more than 14 days before you issued the VAT Invoice. For example, if you issue a VAT invoice on 1 December for goods or services provided before 18 November 2008, or
- You were paid before 1 December 2008
The guidance provided from HMRC relating to this change is based on Time of Supply legislation which is referred to as the '14 day rule'. Under the 14 day rule, if you issue an invoice within 14 days of goods or services being provided, the sale is treated as taking place when the invoice is issued. If the invoice is issued any later, the sale is treated as taking place when the goods or servicesare provided.
Listed below are a number of examples of how to interpretate the 14 day rule based on this change effective 1 December 2008:
| Order Date | Delivery Date | Invoice Date | Required VAT Rate % |
|---|
17/11/2008 | 17/11/2008 | 01/12/2008 | 17.50 |
17/11/2008 | 18/11/2008 | 01/12/2008 | 15.00 |
17/11/2008 | 18/11/2008 | 02/12/2008 | 17.50 |
17/11/2008 | 19/11/2008 | 02/12/2008 | 15.00 |
31/10/2008 | 31/10/2008 | 01/12/2008 | 17.50 |
30/11/2008 | 30/11/2008 | 01/12/2008 | 15.00 |
30/11/2008 | 30/11/2008 | 14/12/2008 | 17.50 |
30/11/2008 | 30/11/2008 | 15/12/2008 | 17.50 |
The purpose of this communication is to update Partners on how the standard VAT rate change affects Pegasus CIS construction industry software.
The new 15% VAT rate
The following options are available to customers of Pegasus CIS:
- Modify the current standard rate VAT code to 15% and add a new VAT Code for the old 17.5% rate
- Keep the current VAT codes as they are and add a new VAT code for 15%
System VAT table setup – When linked to back-office Accounts system
Once a decision has been made on the setup of the new 15% VAT rate you need to update the Back Office VAT table to reflect this (see the relevant Pegasus and Sage guides regarding changing and adding VAT Codes for your particular system). Any changes to Customer or Supplier default VAT Codes should also be done in the back office.
Once completed, the standard back office import routines (System Control -> Ledger Links -> Ledger Synchronisation) should be used to update Pegasus CIS. This should be done for all back office and Pegasus CIS datasets.
Please note that any VAT Code changes made manually within Pegasus CIS would be overridden when these import routines are run.
System VAT table setup – When not linked to back office Accounts system
To modify a VAT rate in Pegasus CIS not linked to a Back Office System:
- Run System Control -> Ledger Links -> Ledger Tables -> VAT Codes
- Click List and select the VAT Code you want to update
- Press Enter or click Detail to view the record
- Modify the record
- Change the VAT Rate field
- Save the record
This should be done for all relevant types of VAT Codes, including Sales & Purchase, EC Registered & Unregistered and Non-EC.To create a new VAT rate in Pegasus CIS not linked to a Back Office System:
- Run System Control -> Ledger Links -> Ledger Tables -> VAT Codes
- Press Ctrl-N to create a new record
- Enter the appropriate Country Type, Transaction Type and the new VAT Code
- Enter the new rate in the VAT Rate field
- Save the record
Please note that any VAT code changes made manually within Pegasus CIS would be overridden should a Back Office Accounts System be linked at a later date.Handling un-posted transactions
The act of importing updated VAT rates from the back office or manually changing the VAT rate in Pegasus CIS does not perform any kind of automatic VAT value recalculate, so you should check any un-posted transactions to ensure that the VAT rate is correct. Where applicable, it may be beneficial to process as many pending transactions as possible before 1 December 2008.
The following areas within Pegasus CIS all perform VAT calculations and/or store VAT values and should be properly reviewed to make sure the correct VAT codes/rates have been used:
- Sales Invoices, Pending Retention Sales Invoices & Sales Invoice Opening Balances
- Contract Applications, Contract Certificates, Contract Application Opening Balances & Contract Certificate Opening Balances
- Contract Receipts (on Job Split -> Retention Tab)
- Purchase Orders & Purchase Invoices
- Subcontractor Applications, Subcontractor Timesheets, Subcontractor Application Opening Balances & Subcontractor Timesheet Opening Balances
- Direct Costs & Bank Expenditure
Remember to take into account the 14 day rule when reviewing these records.Changing the VAT rate on un-posted transactions
If it is decided that either the VAT Code used needs to change or the VAT rate used in a calculation is wrong the following procedure should be followed for each record where the VAT Code is stored:
- Modify the record
- Removed the current VAT Code
- Tab off the field (this will set the VAT value to zero)
- Either re-enter the original VAT Code or enter the new VAT Code
- Tab off the field (this will recalculate the VAT value based on the new rate)
- Check that the calculated VAT value is correct
- Save the record
In areas where both the header and items have a VAT Code, the above procedure will need to be performed on both the header and all items.Contract Sales Certificates and Subcontractor applications and the 14 day rule
Contract Sales Certificates and Subcontractor Applications are both based on a continuous supply of services or “staged payments”. The HMRC Construction Industry Scheme allows VAT on staged payment applications to be deferred until payment has been made/received. One of the construction industry exceptions to standard invoice based processing means that these routines are not subject to the “14 day rule”.
This is defined in the “What about continuous supplies of services e.g. workin progress?” section of the summary guide for VAT registered businesses you have received from HMRC:
For continuous supplies of services, such as ongoing construction work, you should account for the VAT due whenever you issue a VAT invoice or receive payment, whichever is the earlier. In these cases, invoices issued or payments received on or after 1 December will be subject to 15% VAT.
Therefore, all Contract Certificates posted where the VAT has not been deferred should be invoiced at 15% VAT and all Subcontractor Applications and Contract Certificates posted where the VAT has been deferred should be liable for VAT at payment/receipt time of 15%.
Deferred VAT on Sales
This only affects Contract Certificates as Sales Invoices post VAT at time of Invoice and Contractor Applications do not make Back Office VAT postings.
Contract Certificates give the user the choice on how to handle the VAT with the “Defer VAT Posting” flag. If this is set to ‘Yes’ the resulting transaction is posted to the Sales Ledger as an invoice with the full VAT value but posted against an out of scope VAT Code, with the VAT value going to a Deferred VAT Account. This registers the VAT liability in the Back Office but no VAT actually appears on the VAT Return at this stage. When either the invoice is fully matched to a Cash Receipt, or when the VAT is manually released using the options in the “Deferred VAT Certificates” menu, a nominal journal is posted to reverse the out of scope VAT postings and make the actual VAT postings (therefore affecting the VAT Return).
If a Contract Certificate was posted with the VAT deferred, when the cash is received it may include VAT calculated at 15%. Assuming that the Certificate has been fully paid by the Customer, when allocating the cash to the Certificate the payment expected on the Certificate will exceed the cash value by the difference between 15% VAT and 17.5% VAT. The total value of the Certificate effectively needs to be reduced by posting a VAT only Contract Certificate credit which can then be included in the cash receipt allocation.
For example, a Certificate for £1000 @ 17.5% VAT will have £175 VAT posted to deferred which should have been £1000 @ 15% = £150 meaning a VAT only Certificate of (£150 - £175) = -£25 needs to be posted.
The following procedure should be used to post a VAT only Deferred VAT adjustment for Contract Sales Certificates:- Calculate the value of VAT that needs to be adjusted using the above example calculation
- Create a new Contract Certificate for the same Job as the original Certificate
- To keep the Certificate Number correct for the next official Certificate, set it to the same number as the last Certificate posted
- Leave all the values in the “Current” column the same as the ones in the “Previous” column
- Enter the VAT adjustment value into the VAT value field next to the VAT Code/Rate
- Make sure that “Paid” = No and “Defer VAT Posting” = Yes
- Save the record
- Mark the Certificate as Approved
- Update Approved Certificates when all other adjustments have been entered
Please note the following additional points:- If you have any un-posted Contract Certificates for a Job where a previous Certificate needs a VAT correction, you will either need to post them first or make sure that the Certificate Number you enter is less than the first pending Certificate as you cannot approve pending Certificates out of sequence.
- Certificates can be paid out of sequence so the above adjustment might relate to a Certificate that is not actually the last one posted. There is no problem with this but a suitable reference should be used so that they can be easily identified at allocation time and for auditing purposes.
- There might be multiple unpaid Certificates; in this case you can either enter one VAT credit that covers all unpaid Certificates or, to provide better traceability, one for each unpaid Certificate. All pending Certificates for a Job must have a unique Certificate Number so in order to keep the same number for multiple adjustments you will have to enter, approve and post them one at a time.
It is recommended that the VAT adjustment be posted before the cash receipt is posted. This will allow both the original Certificate and the VAT adjustment to be allocated at time of Cash Receipt otherwise the Deferred VAT will not be reversed and will instead have to be manually released using the options in the “Deferred VAT Certificates”.
It is also possible that the cash received will either be a partial payment of one Certificate or may indeed relate to multiple Certificates potentially across multiple Jobs. In this scenario you will have to determine how the Customer has handled the payments, i.e. what VAT rate they used when calculating the value to pay you, and post the appropriate VAT adjustments as necessary.
Deferred VAT on Subcontractors
This only affects Subcontractor Applications as Subcontractor Timesheets post VAT at time of Invoice.
Subcontractor Applications do not give the user a choice and always defer the VAT. When a Certified Subcontractor Application (Certificate) is processed the resulting transaction is posted as a credit to the Subcontractor Control Nominal Account inclusive of the VAT value but with the VAT value on the debit side going to a Deferred VAT Account. This registers the VAT liability in the BackOffice but no VAT actually appears on the VAT Return at this stage. When a Certificate is tagged for payment and posted in a Subcontractor Payments Batch, a nominal journal is posted to reverse the Deferred VAT postings and make the actual VAT postings (therefore affecting the VAT Return).
If a Certificate is posted with 17.5% VAT but when paid it is decided that it should be calculated using 15% VAT then the total value of the Certificate effectively needs to be reduced by posting a VAT only Subcontractor Application credit. When paying the Subcontractor both the original Certificate and the VAT only Credit Certificate should be included in the payment run so that the payment total will be correct for cheques/BACS and the Deferred VAT value will be correctly reversed.
For example, a Certificate for £1000 @ 17.5% VAT will have £175 VAT posted to deferred which should have been £1000 @ 15% = £150 meaning a VAT only Subcontractor Application of (£150 - £175) = -£25 needs to be posted.
This scenario will not arise for unpaid Subcontractor Certificates which can be paid before 1 December. For those that remain unpaid, the following procedure should be used to post a VAT only Deferred VAT adjustment for Subcontractor Applications:
- Calculate the value of VAT that needs to be adjusted using the above example calculation
- Create a new Subcontractor Application for the same Subcontractor, Job and Order as the original Application
- To keep the Certificate Number correct for the next official Certificate, set it to the same number as the last Certificate posted
- Leave all the values in the “Application” column the same as the ones in the “Previous App” column and the values in the “Certificate” column the same as the ones in the “Previous Cert” column
- Enter the VAT adjustment value into the VAT value field next to the VAT Code/Rate
- Save the record
- Mark the Application as Certified
- Process Certified Applications when all other adjustments have been entered
Please note the following additional points:
- For those with Pegasus CIS v2.04.60 or higher, if the VAT tables have been changed before the VAT Credit is posted, when tagging a Certificate for payment the system will prompt to recalculate the VAT at 15% instead. The user should say no to this prompt or they will have to manually correct the balance in the Deferred VAT and Subcontractor Control nominal accounts by posting the difference in the two VAT value calculations as a Non-VAT Nominal Journal (the VAT Return will actually be correct in this case).
- When Payment Certificates are printed they will produce 2 instead of 1: one for the original Certificate @ 17.5% and one for the VAT Credit at 17.5% instead of just one for the net value of 15%. The Subcontractor may need to be informed that it is the combination of both of these Certificates that applies and that the effective rate is 15%. Alternatively, a manual Payment Certificate could be produced.
- If you have any un-posted Subcontractor Applications for a Subcontractor/Job/Order where a previous Certified Application needs a VAT correction, you will either need to post them first or make sure that the Certificate Number you enter is less than the first pending Application as you cannot Certify pending Applications out of sequence.
- Certificates can be paid out of sequence so the above adjustment might relate to a Certificate that is not actually the last one posted. There is no problem with this but a suitable reference should be used so that they can be easily identified at payment time and for auditing purposes.
- There might be multiple unpaid Certificates; in this case you should enter one VAT credit for each unpaid Certificate. All pending Applications for a Subcontractor/Job/Order must have a unique Certificate Number so in order to keep the same number for multiple adjustments you will have to enter, certify and post them one at a time.
Retention Release
Retention release is not covered in any of the recently published HMRC guides, however HMRC have made the following clarification; Any retention released, whether it be from “staged payments” like Subcontractor Applications and Contract Sales Certificates, or one off invoices like Subcontractor Timesheets or Sales Invoices, is handled in the same way.
If an invoice for the full amount due including retention is issued then VAT will be due on the retention at the same rate of the original invoice regardless of when retention is released. Otherwise, the “14 day rule” does not apply and VAT is due at the rate in effect when either an invoice for the retention release is issued or the retention is paid, whichever is earlier.
Sales Ledger invoices issued from Pegasus CIS do not include any retention values so the VAT rate of the original invoice would not apply when releasing retentions. VAT should be applied as follows:
- Contract Sales Certificates – if VAT is Deferred, the VAT rate at time of Cash Receipt should be used, otherwise the rate at time of Certificate posting. The procedure detailed in the “Deferred VAT on Sales” section above should be followed for retention released before 1 December 2008 and not yet paid.
- Sales Invoices – the VAT rate at time the retention release invoice is posted. VAT rates for existing Pending Retention Sales Invoices will have to be updated as detailed in the “Changing the VAT Rate on Un-Posted Transactions” section above.
- Subcontractor Applications – the VAT rate at time of payment should be used. The procedure detailed in the “Deferred VAT on Subcontractors” section above should be followed for retention released before 1st December 2008 and not yet paid.
- Subcontractor Timesheets – the VAT rate at the time the retention release invoice is posted. See below for further information.
Subcontractor Timesheet Retention Release
The Subcontractor Timesheet Retention Release routines in Pegasus CIS apply VAT at the rate stored with the original Subcontractor Timesheet posting, not the rate in effect at the time of release. There is currently no way within the system to change or easily correct the VAT rate used so the following workaround has to be performed by the Pegasus CIS Partner:
The affected records within the CISTimesheetRetentions table should have the VATRate field manually modified to the rate in effect at the time of retention release. Only records where RetentionStatus = ‘OPEN’ should be adjusted.
This issue will be fixed in a future maintenance release. No utilities are required for Pegasus CIS.
