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Pre-Budget Report 2009: VAT returns to 17.5% next year

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9th Dec 2009
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As originally announced when the VAT rate was cut last year, the temporary reduction in standard rate of VAT to 15% will end on 31 December 2009. The chancellor announced in the PBR that the temporary VAT reduction will have delivered stimulus of about £11.5bn into the economy.

This year’s Pre-Budget Report confirms arrangements to smooth the transition for businesses back to the 17.5% rate. There will be a “period of grace” for businesses such as pubs trading across the midnight deadline to charge the lower 15 per cent rate until they close (or until 6 a.m., whichever is earlier), and plans to let shops add the extra VAT to prices at the tills for up to 28 days, giving them extra time to complete the re-pricing of their stock.

The rates under the Flat Rate scheme are amended to reflect the end of the temporary reduction of the standard rate of VAT, as well as the latest data on VAT payments by the various sectors.

VAT Flat Rate Scheme Changes 1 Jan 2010
The VAT Flat Rate Scheme, an optional simplified VAT arrangement for businesses with a turnover up to £150,000, is popular with many small businesses looking to simplify their bookkeeping. The percentages applicable to different business sectors were re-calculated in December 2008 to reflect the temporary reduction in the standard rate of VAT. They have now been re-calculated to reflect the reversion of the standard rate of VAT to 17.5% from 1 January 2010.

The rates are not simply 2.5% higher than before as they also include technical adjustments to reflect more up to date business patterns. As a result, for some sectors the rates will not simply return to the level set prior to the December 2008 changes. Virtually all sectors will face an increase (as a result of the increase in the standard rate) but some sectors’ increases will be bigger than others’. This is consistent with the Treasury’s approach adopted last year when the standard rate went down.

Of the 55 business categories used for Flat Rate Scheme calculations, 11 will have a lower rate from 1 Jan 2010 than they did before the VAT rate reduction last year, and 19 will simply revert to the same rate they used before last December. However, 25 categories will be paying a higher rate and should therefore be checking as soon as possible to ensure that the Flat Rate Scheme remains beneficial to them. If not, they need urgently to notify HMRC of their decision to leave. Fortunately HMRC has the power to agree a retrospective leaving date and the PBR Notes indicate that it will use this “sympathetically” where businesses realise some time after 1/1/2010 that these changes have made the scheme unsuitable for them.

A full list of the revised Flat Rate percentages is available from HMRC's PBR 2009 website.

 

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