The measure

Legislation will be introduced to increase the standard rate of VAT from 17.5% to 20%.
The Chancellor has confirmed that there will be no changes to the current zero rates, such as basic foodstuffs, children's clothing and books; exempt supplies, such as finance, insurance, education and health; and supplies subject to the reduced rate of 5%, such as domestic fuel and power.

Anti-forestalling legislation will also be introduced to counter certain arrangements which seek to apply the 17.5% rate to goods and services to be delivered or performed on or after 4 January 2011.

Who will be affected?

The change to the standard rate of VAT will affect all VAT registered businesses.

The Chancellor has announced that the anti-forestalling legislation is targeted at artificial arrangements and is unlikely to affect suppliers conducting their business as they normally do when no VAT rate increase in anticipated. The new legislation will provide that in certain circumstances a supplementary charge to VAT of 2.5% will be due on supplies of goods and services on which VAT of 17.5% has been declared. The legislation will apply where the customer cannot recover all of the VAT on the supply and one or more of the following conditions are met:

• the supplier and the customer are connected;
• the value of the supply (and related supplies made under the same scheme) exceeds £100,000 - this does not apply if the prepayment or issuing an advance VAT invoice is normal commercial practice;
• the supplier, or someone connected to the supplier, funds a prepayment for the goods or services; or an advance VAT invoice is issued where payment is not due in full within six months (except hire purchase invoices issued in accordance with normal commercial practice).

The supplementary charge to VAT is due on 4 January 2011 and must be accounted for on the supplier's VAT return covering that date.

Similar provisions will apply to prevent the use of the grant of standard-rated rights or similar options as a VAT avoidance mechanism.

When?

The increased VAT rate will have effect for all supplies, EU acquisitions and importations made on or after 4 January 2011.

Changes to the Payment on Account regime thresholds will be made at a later date to maintain the status quo of this scheme.

The anti-forestalling legislation was announced on 22 June 2010 by the Exchequer Secretary to the Treasury in a Written Ministerial Statement. The legislation will have effect for transactions on or after 22 June 2010.