Value Added Tax

Change of standard rate

The standard rate of VAT will increase from 17.5% to 20% from Tuesday 4 January 2011. Goods and services that are currently exempt from VAT or subject to VAT at the zero or 5% rates will not be affected by this change.

Anti-forestalling rules will counter schemes that aim to apply the 17.5% rate to goods or services supplied after 3 January 2011 by invoicing or paying in advance. A supplementary VAT charge of 2.5% will be payable where the customer cannot recover all the VAT on a supply and any of the following conditions are met:

• The supplier and customer are connected.
• The supplier funds the purchase.
• The payment is not due for at least six months.
• The value of the supply is £100,000 or more, unless the prepayment or advance invoice is normal commercial practice.

Saver: Mind the change. If you are planning a major purchase – such as a car – you could save over 2% by buying before January’s VAT increase.

Flat rate scheme

Small businesses can start to use the flat rate scheme if their VAT-exclusive turnover is no more than £150,000, but they must leave the scheme if their VAT-inclusive turnover exceeds £225,000. This exit turnover figure will rise to £230,000 from 4 January 2011.

The flat rates that are applied to gross sales under the flat rate scheme will increase on 4 January 2011 to reflect the increase in the standard rate of VAT. Businesses may leave the flat rate scheme at any time.

Payments on account

Businesses that have an annual VAT liability of £2 million or more must make monthly VAT payments on account. This liability threshold will be increased in 2011.

Zero-rating of qualifying aircraft

From 1 January 2011, the supply of an aircraft will only be zero-rated for VAT if it is to be used by a commercial airline on international routes. Currently, aircraft may be zero-rated based on their weight and usage. This measure was previously announced in March 2010.

Previous announcements

There have been no changes to the announcements made in the March 2010 Budget on VAT for postal services, the place of supply for gas, heat and cooling, and ‘Lennartz’ accounting on restrictions to the recovery of VAT on certain immoveable property, boats and aircraft.