VAT Rate Increase

As you will be aware the VAT rate will increase from its current rate of 17.5% to 20% on 4 January 2011.

In addition the rates applicable to the Flat Rate Scheme will also increase. See below for more details.

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% 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.

When should I apply the new rate?
If you are a retailer you must use the 20% 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 take away (or you deliver) before 4 January 2011, your sale takes place before 4 January 2011 and you should use the 17.5% rate.
If you issue VAT invoices then you must use the 20% 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.

Sales that span the change in rate
There are special rules for sales which span the change of rate. If you provide goods or services before 4 January 2011 and raise a VAT invoice after that date you can choose to account for VAT at 17.5%. You don't need to tell HM Revenue & Customs (HMRC) if you do this.

Services you started before 4 January 2011 but finished afterwards
If you start 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% and the remainder at 20%. If you choose to do this you will have to be able to demonstrate that the apportionment is fair.

Continuous supplies of services
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% on invoices you issue and payments you received on or after 4 January 2011. You may, if you wish, charge 17.5% on the services you've provided in the period up to 3 January 2011 and 20% on the remainder. If you choose to do this you will have to be able to demonstrate that the apportionment is fair.

Flat Rate Scheme
The flat rate percentages have been re-calculated to reflect a standard rate of VAT of 20%. 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. As this turnover threshold is VAT exclusive it is not affected by the change in the standard rate of VAT.

Currently you must leave the Flat Rate Scheme if your total business income (including VAT) exceeds £225,000. However, if your income exceeds this threshold due to a one-off transaction and you expect that your income will fall below £187,500 in the next year you can remain in the Flat Rate Scheme.

These thresholds will be increased with effect from 4 January 2011 to reflect the increase in the standard rate of VAT.
Get the new Flat Rate Scheme thresholds (PDF 228K)
Read more about the new flat rates