Changes to the standard rate of VAT
As announced in the recent Budget, the standard rate of VAT is to increase from 17.5% to 20% on 4 January 2011. There is to be no change to the reduced rate of VAT which remains at 5%, the VAT zero-rate or the list of VAT exemptions. VAT registered businesses are reminded to begin making the necessary system checks to ensure that they are adequately prepared for the change.
We are also reminded that forestalling legislation exists to counter any arrangements that seek to take advantage of the current 17.5% rate for supplies of goods and services to be delivered or performed on or after 4 January 2011.
Businesses using special schemes such as the cash accounting scheme, annual accounting scheme and the flat rate scheme must also ensure that they are aware of how the rate change affects the use of the schemes.
There are special rules for sales that span the change in rate and for the continuous supplies of services. There are also special rules relating to deposits received before 4 January 2011 for sales made after the rate change.
The new VAT fraction will be simpler than the current 7/47ths. In order to calculate the amount of standard rate VAT in a VAT inclusive price from 4 January 2011, the VAT fraction will be 1/6 (being the same as 20/120ths of the VAT inclusive price).