Chancellor announces increase in the standard VAT rate
The Chancellor of the Exchequer presented his Budget to Parliament today. Amongst the package of measures announced is an increase in the standard rate of VAT from 17.5 per cent to 20 per cent. This will take effect 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 5 per cent reduced rate, such as domestic fuel and power, are not affected by this change.
As a supplier it is important to minimise the customer’s VAT cost. As a client it is equally important to ensure that you are not charged more than you need be if the VAT charge will become a cost to you. It appears at this stage there are no plans to adjust the partial exemption de minimise limits.
Further information about the change of rate can be found in VAT – Change of the standard rate to 20 per cent. A detailed guide for VAT-registered businesses.
Anti-Forestalling legislation
Following the announcement to increase the standard rate of VAT from 17.5 per cent to 20 per cent, anti-forestalling legislation is included in the Finance Bill. This prevents VAT registered businesses unable to recover VAT they incur and their suppliers from entering into schemes or arrangements to avoid the effect of the increase.
This measure provides that in certain circumstances a supplementary charge to VAT of 2.5 per cent will be due on supplies of goods or services on which VAT of 17.5 percent has been declared. The legislation has been targeted on artificial arrangements and is unlikely to affect suppliers conducting their business as they normally do when no VAT increase is anticipated. Further information of the anti-forestalling rules can be found in VAT – Change of the standard rate to 20 per cent: Anti-Forestalling legislation.
VAT Flat Rate Scheme
As a consequence of the increase of the standard rate of VAT from 17.5 per cent to 20 per cent, the Flat Rate Scheme (FRS) sector flat rates have also been recalculated to reflect the increase.
The exit thresholds have also been recalculated to reflect the increase. Currently, a business a business has to leave the scheme if either its tax inclusive annual flat rate turnover exceeds £225,000 or, on a forward look, its tax inclusive turnover in the next 30 days can reasonably be expected to exceed £225,000. Both of these exit thresholds will be increased to £230,000 on 4 January 2010 to maintain the same effect.
A list of the FRS sector flat rates applicable after 4 January 2010 can be found in Budget Note 45.
Postal services
From 1 January 2011, the postal services exemption is limited to public postal services by a universal service provider (excluding supplies for which terms have been individually negotiated).
Aircraft
This measure amends the criteria for the zero-rating of supplies of aircraft and associated supplies, with effect from 1 January 2011. It will change the definition of aircraft that can be supplied at the zero rate from one based on weight and usage to one based on the status of the customer. Supplies of aircraft will be zero-rated only where used by airlines operating for reward primarily on international routes.
To discuss any of the above issues please contact The Ensors VAT Team.
This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. No liability is accepted for the opinions it contains or for any errors or omissions.
