VAT changes on 4th January 2011 - and how this may affect you

Before the recent elections, all the main parties were saying that they "had no plans to increase or extend VAT". But in reality, we all knew, I think, that VAT rates would have to be increased, principally because every ‘economic expert’ in the country kept telling us that it was ’inevitable’. The only unknown was, by how much?

Every 1% increase in VAT would raise between £4 and £5 billion for the Treasury - equivalent to a rise of 3% on income tax - a temptation that no Chancellor could resist under these current economic circumstances.  But even at 20%, the UK’s VAT will still be the third lowest rate in the EU, and still less than the average. The general feeling is that this increase will have little effect on economy, as indeed was evidenced by the previous two changes in VAT rates over recent years.

The true numbers

As a matter of interest only, although the rate of VAT is going up by 2.5%, the true increase in the tax, from 17.5% to 20%, is actually a rise of 14.29% (2.5 on 17.5).

And note also, that simply adding 2.5% to your current prices is not correct, and you may well have problems reconciling your VAT returns if you do. The increase on the current price is, mathematically, only 2.13%!

So, are you ready for the change in Standard Rate VAT?

On Tuesday, 4th January 2011 (the first business day in the new year), the standard rate of VAT will increase from 17.5% to 20%. This change will, as on previous occasions, mean a lot of extra work for VAT registered businesses and their accountants. For businesses not registered, and private individuals, consideration might be given, where major purchases are pending, as to whether there are any steps that can be taken to pay the lower rate of VAT, by purchasing prior to the date of change perhaps.

Please note – only standard rate VAT will change – zero and 5% VAT rates will not change.  Flat rate schemes may also change – see note below

Retail Businesses - pricing

The law requires that prices displayed on goods must be the price charged at the till. However, HMR&C appreciate that it is difficult for retail businesses to re-price everything displayed in their stores in the short period available. So, as long as retailers put up notices stating that the ’marked prices’ do not include the extra VAT and that this will be added at the tills, then this is perfectly legal. However, this period of grace is allowed for a maximum of 28 days only.

Apart from having to amend the prices labels, retailers will need to amend and re-program their till systems and their accounting systems to accommodate the VAT increase as it takes effect on 4th January 2011.

It may also be advisable that customers be reminded, prior to 4th January, that the increase will be taking place so that it does not come as an unpleasant surprise. 

Also, importantly to avoid problems if you receive payment by way of standing orders, get new bank mandates set up and signed now, ready to start immediately in the new year.

Non-retail Businesses

Businesses who sell by mail order, or on the Internet, should also revise their price lists and sales literature as instantly as they can. As with retailers, there is still a 28 day period in which to process these changes but clearly customers would prefer the change-over to be made as quickly and simply as possible.

Service providers, such as solicitors, estate agents, accountants, and so on, usually quote their prices excluding VAT, with a note that VAT will be added at the rate applying at the date of supply. Clearly, where the service being provided is incomplete at 4th January 2011, it may be possible to invoice part of the supply at the old rate and part at the new rate.

Record keeping

It is always important, and a legal requirement, to ensure that your accounting records and your VAT records are kept up to date and in good order. This is even more important, and critical, at tax change-over points, especially where the VAT quarter does not coincide with the date of the change in VAT rate. Accounting software and other invoicing software should be updated before you record any sales after the moment of change.

For those of you using the Burns Waring recommended ‘online accounting software’, you need not worry as this will be done automatically for you first thing on 4th January 2011.

Cash accounting issues

Those operating under the cash accounting scheme will need to be able to identify payments received on or after 4th January 2011 that relate supplies being made before that date in order to qualify for the old rate of VAT. This applies also to receipts from sales made prior to the date of change.

Flat rate schemes

If you use a flat rate scheme for small businesses, you will need to review the new rates that will apply to your scheme as from 4th January 2011. These will be provided on the HMRC website here and on page 24 of this publication.

It is possible that you could find, when you apply the new flat rate to your gross sales, you will be worse off than operating the standard scheme. If so, then you should inform your VAT office, in writing, that you wish to leave the flat rate scheme with effect from the start of your next VAT quarter. Be aware however that if you leave the flat rate scheme, you cannot re-join for at least 12 months.


See our quick ‘check-list’ for easy reference (or the HMRC web-site for more detail).

This summary has been prepared by Burns Waring for general guidance only - it does not represent, nor is it a substitute for, professional advice.  Neither the firm, nor its partners or employees, can accept any responsibility for any outcome as a result of acting or not acting upon anything contained in or omitted from these documents.  Should you have any queries or concerns regarding VAT and the changes, please contact the firm for specific advice relative to your situation and circumstances.