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On 4th January 2011 the standard rate of VAT will rise to 20%. As in January 2010, this change will have various implications for businesses. For any sales of standard-rated goods or services that you make on or after 4th January 2011 you must charge VAT at the rate of 20%.
Other rates of VAT are not affected. This change in the standard rate of VAT does not affect sales of goods or services that are charged at another rate, i.e. Zero, reduced or exempt.
If your business only supplies goods or services that are subject to one of these other rates you do not have to change the rate of VAT that you charge.
If your business issues invoices, you must use the 20% rate for all VAT invoices that you issue on or after 4th January 2011. There are other issues to consider:
* There are special rules for sales which span the change of rate. If you provide goods or services before 4 January 2011 and raise a VAT invoice after that date you can choose to account for VAT at 17.5%. You don't need to tell HM Revenue & Customs (HMRC) if you do this.
* If you start work on a job before 4th January 2011 but finish afterwards you may account for the work done up to 3 January 2011 at 17.5% and the remainder at 20%. If you choose to do this you will have to be able to demonstrate that the apportionment is fair.
If you provide a continuous supply of services, such as leasing of equipment, you should account for the VAT due whenever you issue a VAT invoice or receive payment, whichever is the earlier. You must charge 20% on invoices you issue and payments you receive on or after 4th January 2011. You may, if you wish, charge 17.5% on the services you've provided in the period up to 3rd January 2011 and 20% on the remainder. If you choose to do this, you will have to be able to demonstrate that the apportionment is fair.
Businesses supplying goods or services over the internet to end consumers (who are not VAT registered businesses) will need to think carefully about what will be needed, in order to implement price changes. If you provide pre-printed price lists and order forms, you may also need to take further steps to prepare.
If you are a retailer you must use the 20% rate for all takings that you receive on or after 4 January 2011. But if your customer pays on or after 4 January 2011 for something they take away (or you deliver) before 4 January 2011, your sale takes place before 4 January 2011 and you should use the 17.5% rate.
Retailers have 30 days to update their tills, but must display a sign informing customers of the change in the interim. Therefore retail businesses also need to take into account the practical implications re-pricing will have.
The rate of VAT on standard rated goods and services that your business purchases will obviously be higher and therefore input tax claims will increase.
Cash Accounting Scheme
If you use the Cash Accounting Scheme you will need to be able to identify payments received on or after 4 January 2011 that relate to supplies made before that date. VAT at a rate of 17.5% will be due on these payments.
Annual Accounting Scheme
Your instalments will not be affected by the change in the standard VAT rate.
Flat Rate Scheme
The flat rate percentages have been re-calculated to reflect a standard rate of VAT of 20%. The new rates apply from 4 January 2011 until further notice.
To find out what the new flat rate is for your industry sector, click here (scroll down to the bottom of the document)
You can choose to operate the Flat Rate Scheme if your VAT exclusive turnover does not exceed £150,000. This turnover figure is VAT exclusive so it is not affected by the change in the standard rate of VAT.
Currently you must leave the Flat Rate Scheme if your income (including VAT) exceeds £225,000. However, if your income exceeds this threshold because of a one off transaction and you expect that your income will fall below £187,500 in the next year, you can remain in the Flat Rate Scheme.
These thresholds will be increased to £230,000 and £191,500 respectively, with effect from 4 January 2011, to reflect the increase in the standard rate of VAT.
If you make a mistake, you should correct it through the normal error correction procedures, either in the current VAT return, or for larger mistakes, using form VAT 652. HMRC have stated they will adopt a “light touch” in dealing with errors made in the first VAT return after the change, where the error relates to a change of rate issue.
If you would like to talk through the VAT standard rate change then please e-mail us at email@example.com or call 0845 201 1582