HMRC

7th January 2011

How to account for the VAT rate change

The way that you should account for the change in the VAT standard rate depends upon the type of business you have. The special arrangements for businesses trading on 31 December 2009 will not apply to this rate change.

Retailers

If you are a retailer you must use the 20 per cent 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 took away (or you delivered) before 4 January 2011, your sale took place before 4 January 2011 so you should use the 17.5 per cent rate.

If you are a retailer you must clearly show your prices inclusive of VAT. However, following a VAT rate change you will have up to 28 days to adjust your prices. So, from 4 January 2011 to 1 February 2011, you can put up a notice to let your customers know that an adjustment will be made at the till to account for the VAT rate change.


Download guidance on retail sales and the change in the VAT rate from the HM Revenue & Customs (HMRC) website (PDF, 227K) – Opens in a new window.

Businesses that issue VAT invoices

You must use the 20 per cent rate for all VAT invoices that you issue on or after 4 January 2011. But see the page in this guide on sales that span the change in rate.

Download guidance on when to start charging the 20 per cent rate from the HMRC website (PDF, 227K) – Opens in a new window.

VAT invoices raised or deposits received before 4 January 2011 for sales you make afterwards

If you issued a VAT invoice or received prepayment before 4 January 2011 for goods or services which you provide on or after that date VAT will normally be due at the 17.5 per cent rate. In certain circumstances VAT is due at a rate of 17.5 per cent on the date of issue of the VAT invoice or receipt of payment before 4 January 2011 and a supplementary charge of 2.5 per cent then becomes due on the 4 January 2011.

Download guidance on pre-invoicing or pre-payment rules from the HM Revenue & Customs (HMRC) website (PDF, 227K) – Opens in a new window.

Special VAT schemes for small businesses

Cash Accounting Scheme

If you use the Cash Accounting Scheme you 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 per cent will be due on these payments.

Annual Accounting Scheme

Your instalments will not be affected by the change in the standard VAT rate.

Flat Rate Scheme

The flat rate percentages have been re-calculated to reflect a standard rate of VAT of 20 per cent. 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. This turnover figure is VAT exclusive so it is not affected by the change in the standard rate of VAT.

From 4 January 2011 you must leave the Flat Rate Scheme if your income (including VAT) exceeds £230,000. However, if your income exceeds this threshold because of a one off transaction and you expect that your income will fall below £191,500 in the next year you can ask to remain in the Flat Rate Scheme. Your request must be made in writing.

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