Change in the standard rate of VAT

The standard rate of VAT is set to rise from 17.5% to 20% on 4 January 2011. It is hoped the additional revenue generated from the increase will help to reduce the UK deficit.

Applying the higher rate

The rate of VAT that businesses charge depends on the date that goods or services are supplied. For VAT purposes this is the date that goods physically change hands (or a service is completed); or payment is received; or an invoice is issued - whichever is the earliest. The rules are modified in certain situations, including when there is a change in the standard rate of VAT.
For any supplies of standard-rated goods or services that take place on or after 4 January 2011 businesses should charge VAT at the new rate of 20%. As a consequence, firms currently calculating their VAT using the VAT fraction of 7/47 should use the new fraction of 1/6 from 4 January 2011.
Zero-rated supplies, such as basic foodstuffs, children's clothing and books; exempt supplies, such as education and health; and supplies subject to VAT at the reduced 5% rate, such as domestic fuel and power, are not affected by the change.

Anti-forestalling legislation

Finance (No.2) Act 2010 included anti-forestalling legislation to prevent the 17.5% rate applying to supplies of goods or services that are provided on or after 4 January 2011.
The legislation prevents forestalling by introducing a supplementary charge to VAT of 2.5% on the supply of goods or services where the customer cannot recover all the VAT on the supply, and one or more of the following conditions are met:

• The supplier and customer are connectedparties;
• The value of the supply (and any related supplies made under the same scheme) exceeds £100,000. But this does not apply if the prepayment or issuing of an advance VAT invoice is normal commercial practice;
• The supplier or someone connected to the supplier funds a prepayment for the goods or services; or
• An advance VAT invoice is issued where payment is not due in full within six months (except hire purchase invoices issued in accordance with normal commercial practice).
• The supplementary charge to VAT is due on 4 January 2011 and must be accounted for on the supplier's VAT return covering that date.