New VAT Rate

The new standard VAT rate of 20% comes into effect as of the 4th January 2011. This means that any goods or services supplied on or after this date should be charged at the new VAT rate.

However not all goods have the standard VAT added to them and are subject to other rates of VAT. These are NOT affected by the standard rate change. They are as follows:

  • Zero Rated- e.g. most foodstuffs, children’s clothing or books, newspapers or magazines
  • Reduced rated(5%)- e.g. fuel and power for household consumption, children’s car seats
  • Exempt- e.g. education, health and financial services

Retail Businesses

If you are a retailer selling goods to non VAT registered customers, then all standard rated sales made on or after the 4th January 2011 should incur the 20% VAT rate. All standard rated sales before the 4th January will be subject to the 17.5% VAT rate.

Credit Notes

If goods are bought previous to the VAT change but returned after the change and a credit note is to be issued, the rate of VAT to be applied is to be of that of the original invoice, therefore in this case 17.5%.

Invoice businesses

All invoices for standard rated goods and services issued after 4th January should use the VAT rate of 20% where the invoice is issued within 14 days of the goods or services being received.

If a VAT invoice is issued after the 4th January but the goods and services were provided before the 4th January, then the old rate of 17.5% VAT can apply.

What happens if I make a mistake?

HRMC have stated that they will operate a “light touch” policy with regards to any mistakes made due to the increase, on the first VAT return. They are prepared to take into account the difficulties posed to businesses by the change. For more information on the “light touch” policy, please see where HMRC have published a detail guide to the change of standard rate.