In recent months, we’ve been helping clients with VAT rate changes within and beyond the EU. The reason for these VAT rate changes ranges from a desire to reduce inflation, action to help support families with the cost of living, helping businesses deal with rising costs and as in the Swiss case, reforming the state pension system.
When there is a VAT rate increase or a VAT rate decrease, this can:
- Be temporary (i.e. last only for a number of months) or a undefined time period
- Apply to all VAT taxpayers and different VAT rates, i.e. standard and reduced rates (as in the case of Luxembourg)
- Directly impact established business entities or be focused on resident people (as in the case of the reduction of the VAT rate of heating, when applicable)
- Relate to specific goods (e.g. energy, sanitary and food products, as in Spain and in Croatia)
How do VAT rate changes impact your company?
Here are six key elements that need to be considered to avoid non-compliance.
Tax points
To apply the correct VAT rate, the time of taxation must be known and the supplier must be extremely careful when the invoice is issued. This can happen:
- Because of an advance payment
- In the case of a deferred invoice/recapitulative invoice (e.g. invoice issued on the 15th day of the month subsequent to the one in which the transaction takes place)
- For delayed invoices when goods are supplied at a price to be determined later
Rules applied in the countries where your company trades may vary requiring local VAT knowledge.
Issuance of invoices and credit notes
Old and new VAT rates might be included in the same invoice. Moreover, the date and the respective period of the supply might need to be clearly indicated on the invoice and the invoice layout may need amending.
If you’re the customer, to recover the correct amount of VAT you’ll need to verify that your supplier applied the correct VAT rate. If you don’t check this then your right to recover the VAT might be challenged by the local tax authority and you may incur in penalties.
The above becomes harder when you’re the supplier and you have to raise credit notes. In this scenario, you’ll need to check when the original supply was carried out and which VAT rate was applied.
Reporting rules for VAT rate changes
When a VAT rate changes, the VAT returns that have to be submitted are affected since they must mirror your invoices.
Local tax authorities are required to update the instructions of the returns and amend or add further fields/boxes to report the new VAT rate.
For example, if we consider a VAT rate change in Spain:
- Forms 303 and 322 must be amended
- The validations of the registration books of invoices received and issued must be updated for SII purposes
ERP System and VAT codes
ERP systems must be updated and, potentially, new VAT codes may need setting up.
These adjustments can be complex and time-consuming. Since many suppliers need the support of a third-party provider (if the management of your ERP is not in-house but is outsourced or co-sourced) we recommend you contact those supporting you to schedule the required actions.
When VAT rates change, check your website
Perhaps you’ve reviewed all the above points but your website is out of date. The team in charge of the website must be informed of any changes that are applied to the price of your products and avoid unnecessary issues in the communication to your clients.
Prices – from VAT’s effect on hospitality to product pricing
Finally, the price of your products. Indeed, while the taxable amount is not changing because of a government’s decision, the VAT rate will mean that your product might be more or less expensive.
From a commercial point of view, you must decide if:
- In the case of a higher VAT rate, the more significant cost may have to be passed on to your customer or reduce your margin
- In the case of a lower VAT rate, your customer can benefit from it or you can increase your margin
For businesses within the event industry or hospitality, this is a particularly difficult decision. You can learn more in our European Events Guide to Understanding VAT Obligations.
How Sovos can support you
Our team of VAT experts can help you in the timely scheduling of all actions required, reducing the risks associated with changes in VAT rates. These risks can include business inefficiencies or financial penalties for your company or for your customers.
Change can be challenging at the best of times and VAT rates across the world may experience further increases or reductions as governments search for ways to support citizens with the rising cost of living.
When changes to VAT rates are announced or when later applied, we can help ensure they’re applied correctly.
Frequently Asked Questions
When does the VAT rate change?
VAT rates can change at any time and for different reasons. Sometimes this requires your company to act quickly to implement all the changes.
Are VAT rates changing?
This varies country to country. Our VAT Determination software is always updated with the latest VAT rates.
How to change from flat rate VAT to standard?
The Flat Rate VAT Scheme is provided by the UK tax authority, HMRC. Joining or leaving the scheme requires specific eligibility but these requirements can be confusing.
Take Action
Need help keeping up with VAT rate changes? Get in touch with Sovos’ team of tax experts.
