Businesses must charge 20 per cent VAT on all standard-rated sales from 4 January, and retailers must use the new 20 per cent rate for all standard-rated takings they receive on or after 4 January. The new VAT fraction for the 20 per cent rate is 1/6 (used to calculate the VAT element of standard-rated gross takings).
The HMRC guidance states that if your business issues VAT invoices, you must use the new 20 per cent rate for all VAT invoices you issue on or after 4 January, which are issued within 14 days (or longer period that has been agreed with HMRC) of you providing the goods or services.
If you supply goods or services before 4 January 2011, but issue a VAT invoice on or after that date, you can choose to charge VAT at 17.5 per cent.
For a contract that started before 4 January, you can choose to charge the old rate, 17.5 per cent, on services performed before 4 January, and the new rate of 20 per cent on the value of services actually performed after.
From 4 January 2011, you may receive VAT invoices with the new 20 per cent rate, as well as VAT invoices with the old 17.5 per cent rate for goods or services you bought before the rate changed. In such cases, you should claim back VAT at the rate shown on the invoice.
The deadlines for submitting VAT returns remain the same, so you should continue to submit VAT returns in the usual way - whether you send them monthly, quarterly or annually. For returns that span the rate change, you will need to add together both the VAT on sales charged at 17.5 per cent and those charged at 20 per cent. Put this total in Box 1 of your VAT return.
In order to counter businesses taking advantage of the VAT rate change by making arrangements that aim to apply the 17.5 per cent VAT rate to goods or services to be delivered or performed on or after 4 January 2011, anti-forestalling legislation has been introduced. Further details can be found online at the link below.