On Tuesday 4th January 2011 the Standard Rate of Value Added Tax is increasing from 17.50% to 20%. This change will mean a lot of extra work for VAT registered businesses and any non registered business or private individuals should consider whether there are any steps they can take to try and pay at the lower rate if at all possible.

This article sets out some of the issues that VAT registered businesses will need to address and also offers some ideas on how to continue to pay the lower rate even after January 4th.

Retail Pricing

Normally the law says that the price displayed on goods must be the price charged at the till. However HM Revenue & Customs appreciate that when rate changes take effect it is difficult for retail businesses to re-price everything displayed in their stores, even over an extended holiday break as will be the case this year. So long as shops put up notices saying that the marked prices do not include the extra VAT and that this will be added at the tills then this is perfectly legal. However this is only allowed for a maximum of 28 days and is just to make it easier to manage.

Apart from prices shown on labels, retailers will need to program their till systems so that the VAT increase is automatically changed on 4 January 2011. It is also advisable for notices to be posted reminding customers that the change is coming into effect on 4th January so that the increase in price does not come as an unexpected as well as unpleasant surprise.


Businesses who sell by mail order or on the Internet should revise any price lists or sales literature as soon as possible. As with retailers they do have 28 days to complete this process during which time they can provide a similar notice or warning. Service providers, such as accountants, solicitors, estate agents and so on; usually quote their prices ex-VAT with a note that “VAT will be added at the rate applying at date of supply”.

It Isn’t a 2.5% Price Increase

By the way, don’t loose sight of the fact that although the rate of VAT is going up by 2.5% that actually is a tax increase of 14.26% (17.5 x 14.26% = 20). However the total VAT inclusive price of goods will only go up by 2.13% (do the maths yourself) so don’t be tempted to just increase everything by 2.5% or you will have problems reconciling your VAT return.

Record Keeping

It is always important, and a legal requirement, to ensure that your accounting and VAT records are kept in good order. This will be even more important at the changeover point as everyone will have a VAT quarter part of which will be at the new rate and part at the old rate. Accounting and other software should be updated before you record any sales or purchases on 4th January.
Paying the Old Rate for Goods & Services

Anyone, business or private, planning the purchase of a major item might be advised to order before 4 January 2011. That doesn’t mean that you have to actually take delivery of the item before that date because where a customer places an order for goods or services prior to 4 January 2011, even if they are to be delivered after that date, business can generally charge VAT at the (then) current rate of 17.5%.

To apply the current rate of VAT a seller must either issue an invoice, or receive a payment before 4 January 2011. Even if your normal terms of business are “on delivery” or “30 days” it may be permissible for you to extend these terms to say, 90 or even 180 days. However sellers should not artificially advance sales by issuing invoices that are not due for payment for more than six months and you can be sure that HMRC will be looking carefully at any such transactions. If you are thinking of extending your terms in this way you really should take appropriate professional advice or even contact HMRC to check they are happy with what you are doing. Note also that you will be caught by anti-avoidance rules if your business is connected with your customer, or the amount due is £100,000 or more.
Cash Accounting Issues

Those operating the Cash Accounting Scheme 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% will be due on these payments.

Flat Rate Scheme

If you use the flat rate scheme for small businesses you should review the new rates which will apply from 4 January 2011. These are provided on the HMRC guidance website.

It is possible that you could find that when you apply the new flat rate to the gross sales made on and after 4 January 2011, you will be worse off than operating outside the flat rate scheme. If so then you must inform your VAT office in writing that you want to leave the flat rate scheme with effect from the start of your next VAT quarter (though you could leave at any time this can be a bit of a problem working things out). Be aware that if you leave the flat rate scheme you can’t rejoin it for at least 12 months.

Anyone wishing more specific details should contact their accountant, their local VAT office, or James Green & Co.

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Category: Taxation

2 Responses to “Are You Ready for the VAT Rate Change?”

  1. James Green says:

    It has led to an increase in the retail price index and it also has had some effect on falling sales as people cut back their expenditure.

  2. McGill says:

    What effect has the VAT rise had so far

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