June Budget – VAT – Increase in standard rate
In a widely predicted move, the Chancellor has announced that legislation will be introduced in the 2010 Finance Bill to increase the standard rate of VAT. From 4 January 2011 the standard rate of VAT will increase from 17.5% to 20%.
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.
Whilst many businesses expected this move, there is some relief in the business community that the new rate will not be introduced until next year allowing businesses time to make the necessary system and pricing preparations and to allow retailers one less issue to worry about in the run-up to Christmas.
The Chancellor sought to justify the move by saying that the VAT rise ‘will generate £13bn in extra revenue which we won’t have to find from income tax’.
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.