How do you account for a change in VAT rate?
This is a freeview 'At a glance' guide to accounting for a change in the VAT rate.
How to account for changes in the VAT rate during the COVID-19 pandemic
VAT on food, accommodation, attractions and non-alcoholic drinks: 5% rate
From 15 July 2020 to 30 September 2021 to support businesses and jobs in the hospitality sector:
- A 5% rate (fraction: 1/21) of VAT applied to supplies of:
- Food and non-alcoholic beverages sold for on-premises consumption, for example, in restaurants, cafes and pubs.
- Hot takeaway food and hot takeaway non-alcoholic beverages.
- Food and drink supplied as part of a supply of catering services for consumption off-premises continue to be standard-rated.
- Sleeping accommodation in hotels or similar establishments, holiday accommodation, pitch fees for caravans and tents and associated facilities.
- Admissions to attractions that are not already eligible for the cultural VAT exemption.
- Supplies of goods and services on or between these dates should have been charged at 5%.
Position from 1 October 2021
A 12.5% rate (fraction: 1/9) of VAT applied to the above goods and services between 1 October 2021 and 31 March 2022.
- Supplies of goods and services on or between these dates should be charged at 12.5%.
Position from 1 April 2022
From 1 April 2022 supplies of these goods and services will revert to the standard rate.
- Supplies of goods and services on or after 1 April 2022 should be charged at 20%.
How to account for VAT when the standard rate of VAT increased to 20% in January 2011
The standard Rate of VAT increased to 20% on 4 January 2011. The VAT fraction changed to 1/6. The following examples illustrate the principles to apply when there is a change of VAT rate and can therefore be applied to any VAT rate change.
Supplies of standard-rated goods and services made on or after 4 January 2011
- Charge VAT at the rate of 20%.
Supplies of standard-rated goods and services made before 4 January 2011
- Charge VAT at the rate of 17.5%.
- If you invoice later you can (if you want) charge VAT at 20% instead of 17.5%.
There are no changes to any other VAT rates (sales that are zero-rated or reduced-rated for VAT) or exemptions.
Sales that span the change in rate
Goods or services provided before 4 January 2011 where a VAT invoice is raised after that date: you can choose to account for VAT at 17.5%.
Services you started before 4 January 2011 but finished afterwards
When work on a job started before 4 January 2011 but finished afterwards you may account for the work done up to 4 January 2011 at 17.5% and the remainder at 20%. If you choose to do this you will have to be able to demonstrate that the apportionment is fair.
Continuous supplies of services
If you provide a continuous supply of services, such as the leasing of equipment, you account for the VAT due whenever you issue a VAT invoice or receive payment, whichever is earlier. You must charge 20% on invoices you issue and payments you receive on or after 4 January 2011. You may, if you wish, charge 17.5% on the services you've provided in the period up to 4 January 2011 and 20% on the remainder. If you choose to do this you will have to be able to demonstrate that the apportionment is fair.
Where payment is made for a continuous supply By instalment, instalments received from 4 January 2011 will be at the 20% rate.
VAT invoices raised or deposits received before 4 January 2011 for sales you made afterwards
If you issued a VAT invoice or received prepayment before 4 January 2011 for goods or services which you provided on or after that date, VAT will normally be due at 17.5%. If HMRC suspects tax avoidance VAT is due at a rate of 17.5% on the date of issue of the VAT invoice or receipt of payment before 4 January 2011 and a supplementary charge of 2.5% then becomes due on 4 January 2011.
Special VAT schemes for small businesses
Cash Accounting Scheme
If you use the Cash Accounting Scheme you will need to be able to identify payments received after 4 January 2011 that relate to supplies made before that date.
Annual Accounting Scheme
Your instalments will not be affected by the change in the standard VAT rate.
Flat Rate Scheme
The flat rate percentages have been re-calculated to reflect a standard rate of VAT of 20%. Some amendments have also been necessary to ensure that the rates accurately reflect the VAT paid by businesses in each sector. The new rates have applied (see HMRC link below) from 4 January 2011 until further notice.
You can claim back the VAT you have been charged by your supplier at the rate included on the invoice.
Errors on your VAT return
If you discover that you have made an error you can Correct it by making a voluntary disclosure or correcting it on your next return.
This is subject to the error correction reporting threshold that applies to net errors that are the greater of:
- 1% of the Box 6 figure required on your VAT Return for the period when you discover the error: subject to an upper limit of £50,000 or above which must be reported to HMRC.
If you do make mistakes accounting for the change of rate on your first VAT return after the change, HMRC will only seek an adjustment if there is likely to be an overall revenue loss.
For detailed guidance and Flat Rate Scheme percentages: HMRC’s guide to VAT rate change