Value added tax (VAT)
| From | 4 Jan 2011 | 1 Jan 2010 |
|---|---|---|
| Standard rate | 20% | 17.5% |
| VAT fraction | 1/6 | 7/47 |
| Reduced rate | 5% | 5% |
| Current Turnover Limits | ||
| Registration - last 12 months or next 30 days over | £70,000 from 1 April 2010 | |
| Deregistration - next 12 months under | £68,000 from 1 April 2010 | |
| Annual Accounting Scheme | £1,350,000 | |
| Cash Accounting Scheme | £1,350,000 | |
| Flat Rate Scheme | £150,000 | |
Change to the standard rate of VAT
The standard rate of VAT will increase to 20% on 4 January 2011.
Zero rated supplies, such as basic foodstuffs, children's clothing and books; exempt supplies, such as education and health; and supplies subject to VAT at the reduced 5% rate, such as domestic fuel and power, are not affected by this change.
There are no changes to the Cash Accounting or Annual Accounting Schemes.
Anti-forestalling legislation will be included in the Finance Act No 2 2010 to prevent the 17.5% rate applying to supplies of goods or services that are provided on or after 4 January 2011, subject to certain conditions. These measures are targeted at transactions between connected parties, particularly in the insurance and financial services sectors.
VAT flat rate scheme
As a consequence of the increase in the standard rate of VAT from 17.5% to 20%, the flat rate scheme sector flat rates have also been recalculated to reflect the increase.
The VAT flat rate scheme was introduced in 2002 with the objective of simplifying VAT for businesses with an annual turnover up to £150,000, tax exclusive. That threshold remains unchanged.
Lennartz accounting
Under existing rules, businesses can exercise an option to recover VAT in full on the purchase of land, property, boats and aircraft, notwithstanding that the asset is to be used for both business and private purposes. This is done under the so-called ‘Lennartz mechanism', where VAT reflecting the private (or non-business) use is then effectively paid back over a number of years.
From 1 January 2011, the Government will be introducing changes to bring UK legislation in line with recent European case law. As a consequence, VAT will only be recoverable to the extent that the asset is used for business purposes, excluding any private use by the VAT registered business or its staff. Changes in the degree of private use in subsequent years will result in VAT adjustments.
As a result, businesses will not be able to take advantage of the cash flow benefits that are now available when they buy assets to be used for both business and private purposes.
Simultaneously, changes relating to the recovery of VAT on directors' accommodation will also be introduced. These will ensure that there is no entitlement to any VAT recovery on the private use of directors' accommodation.
