Prepare for the VAT rate increase

From 1 January 2010 the VAT rate returns to 17.5%. The rate chargeable is determined by the tax point. If a tax point for supply is 31 December or earlier then the rate of 15% should be used.

When is the tax point?

It is the earlier of:
- Receipt of money
- Delivery of goods or completion of services
- Date of invoice

How will this affect cash flow?

Businesses will pay 2.5% more for their purchases and charge 2.5% more on their sales.

Cashflow forecasts should be reviewed and adjusted where necessary.

Businesses that are not registered will see an increase in costs. Prices should be reviewed to establish what increases can be made and what cost they will have to stand.

Retail and Leisure

Retail and Leisure business will see a reduction in their profit margin. Prices should be reviewed  to establish if any price increase can take place.

From 1 to 14 January 2010 Retailers can use a general notice announcing the change but after this all items should show the correct price.

Contracts and Construction

For ongoing work the 15% rate of VAT can be charged up to 31 December 2009 and the 17.5% rate of VAT for work from 1 January 2010 onwards. You will need to be able to demonstrate that the split is fair and reasonable.

VAT Planning

If you or your customers cannot recover input VAT it may be beneficial to take advantage of advance purchasing of goods prior to the rate increase. This can be achieved by paying in advance or being invoiced in advance. It is not sufficient to merely place an order.

Other Changes

The rates used for the Flat Rate Scheme and Fuel Scale Charge will also change. Businesses should check the rate changes when completing the next VAT return. Please be aware that there will be a split of the two rates during VAT period in which the change arises unless your VAT quarter finishes on 31 December 2009.