VAT and duties

Reduction in VAT rate to 15 per cent

The standard rate of VAT is to be reduced from 17.5 per cent to 15 per cent for a period of 13 months from 1 December 2008 to 31 December 2009.

How this affects you

The normal tax point rules apply where there is a change in the rate of VAT, so for most retailers the effect will be a reduction in their rate of VAT from 1 December 2008 for those products which are subject to the standard rate of VAT. This translates into a reduction in the current retail price of just over 2 per cent. For those businesses which are not retailers the VAT reduction will apply where the tax point for their supplies falls on or after 1 December 2008. This will allow some supplies which have just been made, but have not yet been paid for and for which invoices are not issued until 1 December 2008 or later, to be charged at the 15 per cent rate.

Where invoices have been issued in advance for a supply to be made after 1 December 2008 and VAT has been charged at 17.5 per cent,  the rules allow credit notes to be issued cancelling the VAT charge and for a fresh invoice to be issued with a VAT charge at 15 per cent. As part of the PBR changes, the period within which such credit notes must be issued has been extended from 14 days to 45 days.

The VAT fraction used to calculate the amount of VAT included in a VAT inclusive price is now 3/23rds.

Excise duties

As a result of the change in the VAT rate the Chancellor has announced an increase in excise duties on road fuel, alcohol and tobacco to offset the saving created by the reduction in the VAT rate.

Flat rate scheme

It has also been necessary to revise the rates which are applied to the flat rate scheme to take account of the lower rate of VAT and HMRC has published the new rates which must be applied from 1 December 2008.

The test used for entry to and exit from the flat rate scheme will be simplified from 1 April 2009 and eligibility will be determined solely by the turnover of the business.

Retail schemes – the turnover level from which a retailer must agree a bespoke retail scheme with HMRC will be increased from £100m to £130m from 1 April 2009.

Air passenger duty (APD)

Currently APD applies at two different rates in two different bands which are determined respectively by the class and destination of travel. From 1 November 2009 the bands are to be revised into four destination bands determined by the length of the journey from London to the capital of the destination country.  From 2010 the rates of APD will be increased significantly for long haul flights.