Press Releases

December 2010

Time to prepare for VAT rise

South-West chartered accountants Milsted Langdon are warning that there is only one month to go until VAT goes up to 20 per cent, and businesses are being reminded to start preparing now for the change.

From 4 January 2011, all standard-rated goods and services will carry a VAT charge of 20 per cent. For cash businesses that work out VAT using a fraction, the new figure will be 1/6.

Hugh Mitchell from the firm said: “The new rate applies for all takings received on or after 4 January. Payments on or after 4 January for goods or services delivered prior to that date will be deemed to have occurred before the changeover and the old 17.5 per cent rate will still apply.

“In addition, a business that supplies goods or services before 4 January but issues the invoice after that date can also apply the 17.5 per cent rate. If an invoice is issued before 4 January for goods and services supplied on or after that date, the 17.5 per cent rate would normally be used, although the business can choose to use the 20 per cent rate if they wish.”

If a business supplies a service that staggers the changeover date, the lower rate must be charged for time and resources used before 4 January and the higher rate for the remainder, and the business must be able to show that it has worked out the division fairly.

Where the supply of services is continuous, the 20 per cent rate should normally apply to invoices issued or payments received on or after 4 January, although the business can choose to apply the 17.5 per cent rate for services supplied before the changeover date.

The above rules only apply to standard-rated products and services. Zero-rated and reduced-rate (five per cent) sales will not be affected, and nor will exempt goods.

One way to calculate the effect the new rate of VAT will have on prices, is to multiply the old price by 120/117.5. Of course, businesses do not have to increase their prices by this amount, but they will have to pay HM Revenue and Customs the additional VAT.

For more information call on 0117 945 2500.