Value Added Tax (VAT)

Changes to the standard rate of VAT

In a move that will affect all businesses registered for VAT, the standard rate of VAT has been cut from 17.5% to 15%, effective from Monday 1 December 2008. The rate will remain at 15% until 1 January 2010 when it will revert to 17.5%.

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 5%, such as domestic fuel and power are not affected by this change.

Anti-forestalling legislation will be introduced in the 2009 Finance Bill to ensure that businesses are not able to use artificial arrangements to reduce the VAT rate on goods or services to be provided after the VAT rate reverts to 17.5% where there is no current economic activity. Genuine commercial transactions should not be affected.

The measure includes two consequential changes. Firstly, it amends the percentages used in the flat rate scheme for small businesses to reflect the reduction in the standard rate of VAT.

Secondly, it introduces a change to the timing of credit notes issued following a change of rate.

Operative date

The 15% rate will have effect for:

  • supplies of goods and services made on or after 1 December 2008
  • imports on or after 1 December 2008
  • acquisitions of goods from other Member States on or after 1 December 2008

The anti-forestalling legislation will have effect for arrangements entered into on or after 25 November 2008.

The consequential changes to the flat rate scheme percentages and the timing of credit notes will have effect on and after 1 December 2008.

Credit notes for payments received and VAT invoices issued in advance of

1 December 2008

Where payment has been received or a VAT invoice issued before 1 December 2008, VAT will have been charged at 17.5%. But where that payment or invoice relates to goods or services that are provided after 1 December 2008, the VAT rules allow the supplier to apply the new VAT rate, 15%, to the earlier payment or invoice.

Suppliers who choose this option are required to issue a credit note to their customer, if they have issued a VAT invoice, to evidence the credit for the reduction in VAT that is now due. The VAT Regulations specify that such a credit note must be provided to the recipient of the supply within 14 days after the change of rate. This time limit will be extended to 45 days.

Further information

Detailed information is provided in two supplementary documents:

These can be seen on the HMRC website at

Flat Rate Scheme entry rules

With effect from 1 April 2009, the test that requires a business to check that its total income is less than £187,500 for entry into the VAT Flat Rate Scheme will be removed. Instead, eligibility to join the scheme will be determined solely by the taxable turnover of the business, which must be less than £150,000.

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