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Your guide to the standard VAT rate increase to 20 percent

London, UK (07/12/2010)

The standard rate of VAT is currently 17.5 percent but will increase to 20 percent on 4 January 2011. Make sure your business is prepared by reading this summary and consulting with your financial management professional.

Summary
On or after 4 January 2011, you must charge VAT at the 20 percent rate on any goods or services that are on the standard rate scheme. There is no change to zero-rated, reduced rated sales or exemptions.

What do I do when I have a sale that spans the VAT rate change?

  • If a customer has a service or product delivered before 4 January 2011 and pays for it after this date, the 17.5 percent VAT rate should be paid.
  • If you are continuing work that started before the 4 January 2011 and continues after this date, you should break up the VAT charge. All work provided before 4 January 2011 to be charged at the 17.5 percent rate and all work on or after this date to be charged at the 20 percent rate. It must be very clear to the customer how this has been portioned to avoid invoice dispute issues.
  • If you receive a prepayment for a good or service before 4 January 2011 but it is not delivered to the customer until after this date, this should remain at the 17.5 percent rate. Please check this with your financial management professional for your individual circumstances. You may find that you are one of the businesses that should be charging an additional 2.5 percent that will be due after 4 January 2011.

Credit notes and refunds: what rate do I issue them at?
All refunds and credit notes should be made using the VAT rate that was in use at the time. For example, you should give a refund using the 17.5 percent VAT rate if this was what was listed on the original invoice or receipt, dated before 4 January 2011.

At what rates do I reclaim VAT?
This works in the same way as to how you will be issuing invoices that span the VAT rate change period. You should claim anything that you paid for or received before 4 January 2011 at 17.5 percent and anything on or after this date at 20 percent.

Will this change how I complete VAT returns after 4 January 2011?
You should continue to complete VAT returns in the same manner as before. If you have returns that span the rate change period, you should add together the VAT charge on sales at 17.5 percent and at 20 percent to gain your total VAT.

What to do if you make any mistakes on your VAT return?
Don’t panic! You make a voluntary disclosure to HMRC or you can include this on your next return subject to the time limitations. If you need to know what the time limitations are, please consult with your financial management professional, these are determined by your individual circumstances.

Special VAT rate schemes and how these will be affected
The Flat Rate Scheme
You will begin to use a new flat rate percentage on and after 4 January 2011 that will reflect the change to 20 percent.
If you are close to the income threshold of £225,000 including VAT which forces you to leave this scheme, you may be concerned that the switch to 20 percent may now send you above this. If it is a one-off transaction that sends you over this threshold and your income is likely to fall below £187,500 in the next year, then you will be safe to remain on the scheme. Please contact your financial management professional to gain the advice you require to be sure this is correct for your individual situation.
HMRC will be increasing the threshold from 4 January 2011 to reflect the increase in the standard rate of VAT.

The Cash Accounting Scheme
You will be able to charge VAT at a rate of 17.5 percent on all payments made to you for goods or services that are delivered before 4 January 2011. Make sure you are able to identify these clearly.

The Annual Accounting Scheme
This transition should be smooth for you as you will find your installments will not be affected by the VAT rate change.

We hope you find this summary useful. We recommend you use this only for the base of your understanding and consult with your financial management professional on your individual situation.



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