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Standard rate of VAT to revert to 17.5%

Standard rate of VAT to revert to 17.5%

As previously announced, on 1 January 2010 the standard rate of VAT reverts to 17.5% after a period of 13 months at 15%. The reduction was welcome during a time of recession but now it is back to 'as you were'.

Clearly, the main impact will be on private individuals, who are 'final consumers' in that they are unable to reclaim any VAT they pay on goods or services. However, retailers, exempt and partly exempt businesses will also be affected in real terms, but is there anything they can do to mitigate the impact of the rise?

HM Revenue and Customs will allow the basic tax point to apply to goods delivered or taken away before 1 January but paid for on or after that date. Consequently, the 15% rate will still apply to such sales. It will also be possible to take deposits or prepayments before the change relating to supplies, which take place after it. However, there are anti-avoidance provisions to prevent abuse.

The trade of certain types of business will span midnight on 31 December 2009 and thankfully, HM Revenue and Customs has acknowledged it would be unfair to expect them to stop what they are doing on a busy New Year's Eve and change their systems to cope with an extra 2.5% VAT. Businesses will be allowed to continue applying the 15% rate until their trading session ends that night, or until 6am, whichever is the earlier. The types of business affected are:

  • pubs, clubs, restaurants and similar
  • retail shops
  • telecommunications providers

 

Exempt and partly exempt businesses (and those with non-business activities, notably charities) should particularly consider taking advantage of early deliveries of goods or deposits or prepayments as explained above, where supplies received will be used in full or in part other than for taxable purposes because by so doing, they will minimise irrecoverable input tax. Business owners should also note that where a supply of services spans the change, i.e. it starts before 1 January 2010 but does not finish until on or after that date, the supplier may choose to split his invoice to show amounts due at the two rates. As that treatment is optional, recipients of such services, whose input tax is not fully recoverable, should encourage their suppliers to take up the option.

Other businesses affected by the changes include those using cash accounting, who must clearly identify receipts before and after the change date, and those using the flat rate scheme as percentages will revert to their November 2008 levels. All should remember that the VAT fraction for determining the VAT amount from a VAT-inclusive figure reverts to 7/47, from 3/23, and apart from gross takings, this will also affect, for example, fuel scale charges.

Like no other time, rate changes demand a full understanding of the tax point rules so businesses are encouraged to review these along with the helpful transitional rules, covered in a detailed guidance document from HM Revenue and Customs, available on its website.

Changes to the Flat Rate Scheme

Changes to the flat rate scheme have been announced, which were generally expected and necessary because the standard rate of VAT is to revert back to 17.5% on 1 January 2010, after 13 months at 15%.

The scheme allows small businesses with an annual turnover up to £150,000 to pay HM Revenue and Customs a fixed percentage of their turnover, rather than the usual payment of output tax and recovery of input tax on actual positive rated outputs and inputs. The percentages are based on the norm for particular business sectors based on statistics available to HM Revenue and Customs.

The percentages were revised downwards on 1 December 2008 when the standard rate was reduced to 15%. However, the changes from 1 January 2010 will not only reflect the reversion to the 17.5% standard rate, but also take into account business patterns across the various sectors over the last year.

Joining the scheme is optional and businesses are entitled to leave it any time. Leaving the scheme retrospectively is at HM Revenue and Custom's discretion. However, HM Revenue and Customs have stated that they will apply this sympathetically if businesses consider it is no longer helpful to them after the changes.

Since its introduction in 2002, the flat rate scheme has generally been helpful to small businesses, so the forthcoming changes afford an opportunity for all qualifying businesses to assess its relevance to them.