Value Added Tax

Increase in the Standard Rate

With effect from 4 January 2011, the standard rate of VAT will rise from 17.5% to 20%. There will be no changes to the scope of zero-rating, reduced-rating, or exemption.

Change in the Standard Rate – Anti-Forestalling Measures

The summer Finance Bill will include provisions to counter schemes that purport to apply the 17.5% rate of VAT to goods or services delivered or performed on or after 4 January 2011, the date on which the standard rate increases to 20%. The legislation will provide that, in certain circumstances, a supplementary VAT charge of 2.5% will be due on supplies of goods or services on which VAT has been declared at 17.5%. This charge will apply where the customer cannot recover all the VAT on the supply and one of the following conditions is met:

  • the supplier and customer are connected parties;
  • the supplier, or someone connected with him, funds a prepayment;
  • an advance VAT invoice is issued where payment is not due in full within 6 months (except for hire purchase invoices issued in accordance with normal commercial practice);
  • the value of the supply (and any related supplies) exceeds £100,000 (this does not apply if a prepayment, or the issue of an advance VAT invoice, is normal commercial practice).

The supplementary charge will not apply to prepaid or invoiced rentals of land, buildings or other assets if the period concerned does not exceed 1 year and the payment or invoicing method is normal commercial practice.

The supplementary charge will also apply to rights and options. The legislative provisions will have effect for transactions on or after 22 June 2010.

Changes to the Flat Rate Scheme

The rates applicable to businesses using the VAT flat rate scheme will be recalculated with effect from 4 January 2011, to reflect the increase in the standard rate of VAT to 20%.

The exit threshold (i.e. the level of turnover beyond which a business is required to leave the scheme) is increased from £225,000 to £230,000. Where the increase is due to a one-off transaction, a business may remain in the scheme if it expects its turnover in the subsequent year to be less than a specified amount, which will rise from 4 January 2011 from £187,500 to £191,500.

Change to Zero-Rating of Qualifying Aircraft

The definition of aircraft which may be supplied at the zero rate will be amended with effect in relation to supplies made on or after 1 January 2011. From that date, zero-rating will apply to supplies of aircraft ‘used by airlines operating for reward chiefly on international routes’. (The current definition refers to aircraft weighing not less than 8,000kg, and neither designed nor adapted for recreation or pleasure.)

This change is to bring UK legislation into line with EU legislation.

Gas, Heat and Cooling

With effect from 1 January 2011, the application of the reverse charge to certain supplies of gas and electricity will be extended to supplies in all categories of natural gas pipeline, where the pipeline is situated in the EU or is linked to such a pipeline. The reverse charge will also apply to heat and cooling supplied through networks.

In addition, the import VAT relief (in the form of zero-rating) will apply to all natural gas, heating and cooling imported via a network (including liquefied natural gas by tanker).

Postal Services

With effect from 31 January 2011, the exemption for supplies of postal services by Royal Mail will be restricted to those services which are made under a licence duty, i.e. public postal services and incidental goods. Other services (such as those made by Parcelforce) will become standard-rated.

Changes to Lennartz Accounting

The Lennartz procedure, under which a business may initially recover VAT in full on the purchase of an asset even where there is an element of non-business use, is to be changed. Amendments to VATA 1994 will:

  • distinguish between business input tax and non-business VAT;
  • ensure that VAT is not recoverable on the private or non-business use of specified assets;
  • provide a power to treat non-business VAT as input tax;
  • ensure that VAT on the private use of directors’ accommodation is not recoverable.

The capital goods scheme will be amended to take into account changes in the business/private use of an asset.

As a revenue protection measure, output tax will continue to be due in respect of supplies for which credit was allowed under the Lennartz mechanism.

The changes will, for the most part, apply from 1 January 2011, with the proviso that the revenue protection measure will be deemed always to have had effect.