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Firm News
VAT – Change of the standard rate to 20 per cent
- In his 2010 Emergency budget the Chancellor announced an increase in the standard rate of VAT from 17.5% to 20% effective from 4 January 2011.
- This change in the standard rate of VAT does not affect sales of goods or services subject to other rates of VAT (zero rated, reduced rated and exempt).
- 20% VAT should be charged on goods and services on or after 4 January 2011. However, there are special rules for supplies which span the change of rate. Under these rules if you provide goods or perform services before 4 January 2011 and raise a VAT invoice after that date you can choose to account for VAT at 17.5%. You do not need to tell HMRC if you do this. Please note that this is optional.
- If your prices are VAT inclusive the VAT fraction for the 20% rate is 1/6. If you want to increase your VAT inclusive prices to take account of the increase you should multiply your old prices by 120/117.5.
- Deposits/Prepayments – If you receive a deposit before 4 January 2011 for goods or services that you will supply on or after that date the 17.5% rate of VAT will apply to the deposit and 20% will apply to the balance.
- Legislation has been introduced to prevent avoidance where arrangements are made to account for VAT at 17.5% in advance of 4 January 2011 in respect of goods or services to be provided afterwards. The legislation will only apply to certain transactions and is unlikely to affect you unless:
- you receive prepayments from persons connected to you for future supplies;
- you issue advance VAT invoices to persons connected to you for future supplies;
- you provide or arrange funding for your customers to enable them to pay in advance for goods or services to be supplied by you;
- you issue VAT invoices that do not have to be paid for at least six months;
- you receive pre-payments or issue advance VAT invoices in excess of £100,000, and this is not normal commercial practice;
- you supply rights or options to receive goods or services from you free of charge or at a discount.
- There are many businesses which have specific VAT accounting rules and you should contact us for advice on how the change in rate will affect you (Auctioneers, Barristers, Clubs and Associations, Construction services, Solicitors and services supplied on a continuous basis).
- HMRC wants to encourage and assist businesses as they make the changes necessary to deal with the change and will operating a ‘light touch’ in dealing with errors made in the first VAT return after the change.
- The change will affect the majority of businesses and if you are unsure about how this will affect you please contact Elliott Buss (elliottb@bpuaccountants.co.uk)
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