Preparing for the increase in VAT to 20%

On 4 January 2011 the standard rate of VAT will increase from 17.5% to 20%.
Whilst this is the third time the VAT rate has changed in the last two years ,we thought we would try and clear up any confusion that it might cause by explaining the main points:

Invoices raised before 4 January 2011 for goods or services on or after that date.

If you raise invoices before 4 January 2011, for goods or services supplied on or after that date you would then be correct in using the 17.5% VAT rate (subject to below).

There are some anti avoidance rules that must be followed, if any of the following apply then you must pay the additional 2.5%:

  1. The supplier and the customer are connected parties (related individuals or companies under common control)
  2. The supplier funds, or arranges the funds for the customer’s purchase.
  3. Payment is due six months or more after the invoice date.
  4.  The amount exceeds £100,000 excluding VAT (where this is not common practice)

Sales that span the change in rate

If you provide goods or services before 4 January 2011 but raise a VAT invoice after that date you can choose to account for the VAT at 17.5% without needing to tell HMRC.

Services you start before 4 January but finished afterwards

You have a choice in this situation, you can simply account for VAT at 20% or you can split the invoice to apportion the work done on a time. The work performed before 4 January 2011 will attract VAT at 17.5%, and the rest of the work will have VAT applied at 20%. If you choose to do this you will have to be able to demonstrate that the apportionment is fair.

Continuous supplies of services

For continuous supplies of services, such as ongoing construction work, you should account for the VAT due whenever you issue a VAT invoice or receive payment, whichever is the earlier. In these cases, invoices issued or payments received on or after 4 January 2011 will be subject to 20% VAT.

Credit notes raised on or after 4 January 2011

Any credit note subsequently raised against an invoice must be based on the percentage of VAT used on the original invoice.  This may cause some software problems using computerised systems so care is needed here (always check the rate of the original invoice).

Special VAT schemes for small businesses

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 per cent will be due on these payments.

Flat Rate Scheme

The flat rate percentages have been re-calculated to reflect a standard rate of VAT of 20 per cent. The new rates apply from 4 January 2011 until further notice.

The list of new rates can be found here.

Other things to note:

Road fuel scale charges

Many businesses reclaim input tax on the road fuel they purchase for cars and account for output tax using scale charges published by HMRC to reflect private use. New scale charge rates apply from 4 January 2011 – details are available in Appendix C of the VAT technical guide on the HMRC website here, in our library here or from the National Advice Service helpline.  

VAT fraction

The VAT fraction is used to quickly calculate the VAT element of a price that is inclusive of VAT.

The VAT fraction at 17.5% is 7/47.
Eg. If you fill your car with £50 of petrol on or before 3 January 2011 the VAT you will pay is £7.45 (£50 x 7/47)

At the new 20% rate the fraction is 1/6.
Eg. If you fill your car with £50 of petrol after 3 January 2011 the VAT you will pay is £8.33 (£50 x1/6).
This post was compiled by Richard Simpson on behalf of the Balance Team.

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