The standard rate of VAT increased from 17.5 per cent to 20 per cent on 4 January 2011.
For any sales of standard-rated goods or services that you make on or after 4 January 2011 you must charge VAT at the 20 per cent rate. If you have a cash business and calculate your VAT using the VAT fraction you must use the VAT fraction of 1/6 on your standard-rated VAT inclusive sales from 4 January 2011.
The change only applies to the standard VAT rate. There are no changes to sales that are zero-rated or reduced-rated for VAT. Similarly, there are no changes to the VAT exemptions. Any sales you make at these rates are unaffected by this change.
This guide tells you how to account for the change to the standard rate of VAT. It also tells you where you can get further information.
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The way that you should account for the change in the VAT standard rate depends upon the type of business you have. The special arrangements for businesses trading on 31 December 2009 will not apply to this rate change.
If you are a retailer you must use the 20 per cent rate for all takings that you receive on or after 4 January 2011. But if your customer pays on or after 4 January 2011 for something they took away (or you delivered) before 4 January 2011, your sale took place before 4 January 2011 and you should use the 17.5 per cent rate.
If you are a retailer you must clearly show your prices inclusive of VAT. However, following a VAT rate change you will have up to 28 days to adjust your prices. So, from 4 January 2011 to 1 February 2011, you can put up a notice to let your customers know that an adjustment will be made at the till to account for the VAT rate change.
You must use the 20 per cent rate for all VAT invoices that you issue on or after 4 January 2011. But see our section below on special rules for sales that span the change in rate.
There are special rules for sales which span the change of rate. If you provided goods or services before 4 January 2011 and raised a VAT invoice on or after that date you can choose to account for VAT at 17.5 per cent. You don't need to tell HM Revenue & Customs (HMRC) if you do this.
If you started work on a job before 4 January 2011 but finish afterwards you may account for the work done up to 3 January 2011 at 17.5 per cent and the remainder at 20 per cent. If you choose to do this you will have to be able to demonstrate that the apportionment is fair.
If you provide a continuous supply of services, such as leasing of photocopiers, you should account for the VAT due whenever you issue a VAT invoice or receive payment, whichever is the earlier. You must charge 20 per cent on invoices you issue and payments you receive on or after 4 January 2011. You may, if you wish, charge 17.5 per cent on the services you provided in the period up to 3 January 2011 and 20 per cent on the remainder. If you choose to do this you will have to be able to demonstrate that the apportionment is fair.
If you issued a VAT invoice or received prepayment before 4 January 2011 for goods or services which you provide on or after that date VAT will normally be due at the 17.5 per cent rate. In certain circumstances VAT is due at a rate of 17.5 per cent on the date of issue of the VAT invoice or receipt of payment before 4 January 2011 and a supplementary charge of 2.5 per cent then becomes due on the 4 January 2011.
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.
Your instalments will not be affected by the change in the standard VAT rate.
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.
You can choose to operate the Flat Rate Scheme if your VAT exclusive turnover does not exceed £150,000. This turnover figure is VAT exclusive so it is not affected by the change in the standard rate of VAT.
From 4 January 2011 you must leave the Flat Rate Scheme if your income (including VAT) exceeds £230,000. However, if your income exceeds this threshold because of a one off transaction and you expect that your income will fall below £191,500 in the next year you can ask to remain in the Flat Rate Scheme. Your request must be made in writing.
Currently if you have an annual VAT liability of £2 million or more you must make interim payments on account at the end of the second and third months of each VAT quarter. You must include a balancing payment for the quarter (the quarterly liability less the payments on account made) with your VAT return. The level of interim payments that apply for one year is based on your VAT liability in the previous year.
If your annual liability currently falls below £1.6 million you can apply to stop making payments on account.
These thresholds will be increased from £1.6m and £2m to £1.8m and £2.3m to reflect the increase on 4 January 2011 of the standard rate of VAT. As appropriate, the thresholds will be increased on 1 June 2011 for quarterly reviews and on 1 December 2011 for annual reviews.
You can claim back the VAT you have been charged by your supplier in the normal way. You will still be receiving invoices on or after 4 January 2011 showing 17.5 per cent VAT relating to purchases you have made before the rate change. In these cases you should claim back VAT at 17.5 per cent.
After 4 January 2011 you should continue to receive and submit VAT returns in the normal way - monthly, quarterly or annually. The deadlines for submitting your VAT returns and making payments are unchanged. For return periods that cover both before and after 4 January 2011, you will need to add together the VAT on sales charged at 17.5 per cent and the VAT on sales charged at 20 per cent to work out the total VAT on sales to be included in box 1 of your VAT return.
If you discover that you have made an error you can correct it in the normal way by making a voluntary disclosure or correcting it on your next return (subject to the normal limit).
If you do make mistakes accounting for the change of rate on your first VAT Return after the change, HMRC will only seek an adjustment if there is likely to be an overall revenue loss.