With a temporary drop in VAT to begin on 15th July for certain products, we have put together guidance with examples of how our systems will handle the changes so you can be prepared.
Chancellor, Rishi Sunak, has announced a temporary drop in the sales tax from 20% to 5% for food, non-alcoholic drink, accommodation and attractions in the UK. The temporary VAT rate reduction will come into effect on Wednesday 15th July lasting until Tuesday 12th January 2021.
Please note the guidance below on the sales order process for users of our systems.
What You Should do Now to Prepare for Wednesday’s VAT Rate Changes
We recommend setting up a new VAT code immediately with a rate of 20%. All items that are moving to a 5% rate next Wednesday should be moved over to this new code as soon as possible. This can be done via the item export/import facility; simply set the new VAT code on the items and import to reset. That way, next Tuesday evening, all that needs changing is the VAT rate against the new code (change from 20% to 5%).
It is important to note that the selling price at the till won’t change unless a price change is also applied.
How Our Systems Handle SOP VAT and Rate Changes
The way our retail systems handle VAT in the Sales Order Process is to process the VAT at the point of delivery. This affects the way orders and VAT are processed.
For example, take an order raised today with a 20% VAT rate. Initially when order is raised, the VAT on the order lines is calculated at a rate of 20% and the booked sales are all created with a 20% VAT breakdown.
Option 1 – No VAT Rate Change
If that order is delivered and there is no VAT rate change, then everything is correct.
Option 2 – Reduced VAT Rate
Alternatively, the product could be subject to the reduced rate of 5%. If the order is now delivered, then the VAT is recalculated at the point of delivery. The sales order detail lines are adjusted for the new VAT value. The booked sales are also adjusted for the new VAT value. All postings to the sales ledger and nominal ledgers are at the new rate. This effectively increases the profit margin, allowing for a reduction in the price to the customer.
Option 3 – Reduced VAT Rate on Split Orders
If the order was partially delivered at the original VAT rate, then the sales order line will have been split at the point of partial delivery. When the order is completed at the new rate, again the split out line will have the VAT re-calculated and the corresponding sales order lines and booked sales will be updated. Ledgers will be posted to using the new VAT breakdown.
Option 4 – Split Orders with Different VAT Rates
Any invoice produced will use the VAT rate as calculated at the point of delivery, so any split orders with different rates will have the VAT shown as a total of the VAT at different rates.
When VAT returns to its original rate after the period of rate reduction is over, the reverse of the above is true.
Please contact our support team if you require assistance or further information.
