UK to bring its standard rate of VAT in line with EC median

The standard rate of VAT in the UK will be increased from 17.5% to 20% on 4th January 2011. This will bring it in line with the median VAT rate in the EU which is 20%. This is still well short of the 25% charged in Denmark, Sweden and Hungary.  There are only two countries whose standard rate is the lowest permitted in the EU and they are Luxembourg and Cyprus who continue to operate at 15%.

Several other EU countries are increasing their standard rates of VAT on 1st July 2010.  Spain will go from 16% to 18%, Portugal from 20% to 21%, Greece from 21% to 23% and Finland from 22% to 23%.  This follows the trend set by other countries that have already introduced increases in their standard rates.

The UK is also introducing anti-forestalling legislation which will be retrospectively applied from 22nd June 2010. The aim will be to prevent invoices being raised in 2010, with VAT at 17.5%, in respect of goods and services actually provided in 2011.

Apart from the increase in the UK standard rate of VAT the Emergency Budget did not impose any other VAT increases.  It did not, as many feared, increase VAT on food, children’s clothes and the printed word, all of which are currently zero-rated.

I spoke with Tony Cooney of Ashworth Treasure who contributed to the May Business Briefing when he was concerned that there might be significant changes to Capital Gains Tax.  Tony’s view on the Emergency Budget is “From a business perspective there were no great shocks.  Many, including myself, speculated over the Capital Gains Tax regime changes and the Chancellor plumped for a simple ‘middle of the road’ increase rather than something complicated. Importantly, there is a positive advantage for entrepreneurs by extending the limit at 10% from £2m to £5m.  The VAT increase was an easy option as it is tax payable that we can’t easily see or quantify.  If the increase is passed straight on to the consumer then VAT inclusive prices will go up by 2.13%.  However given that the increase has been deferred by six months there is sufficient time for retailers and the like to decide whether to increase prices or during these difficult times leave them as they are and remain competitive.”

My colleague, Peter Hughes, has written an excellent document which describes the tax implications of the Emergency Budget.  More details.

Peter also presents the seminar, The Essential Guide to the European System of VAT.

Stephen Smith
Managing Director, UK Training (Worldwide) Limited