VAT changes come into effect

1 December 2008

The standard rate of VAT has dropped as from 1 December from 17.5 per cent to 15 per cent.

The cut will remain in place until the end of next year.

Richard Dodd of the British Retail Consortium (BRC) said that the actual impact on prices in the shops would be a reduction of 2.1 per cent.

Mr Dodd commented: “Most retailers, especially major retailers, will be passing this reduction on, but I think they won’t necessarily all be taking the 2.1 per cent off the price.

“Some will concentrate the reduction in a more targeted way, reducing certain items by more. Some may also reduce the price at the till, rather than reducing the price displayed on the shelves.”

Under the code of practice laid down by the Department for Business Enterprise and Regulatory Reform, businesses can pass on the reduction at the till for two weeks into December, a measure that smaller retailers may choose to adopt.

Concerns have arisen that some small businesses operating the flat rate VAT scheme may lose out through the changes.

The flat rate scheme simplifies VAT calculations for firms with a turnover of less than £150,000 by removing the need to calculate and record output tax and input tax in calculating the net VAT due to HM Revenue & Customs.

The rate is set according to the type of business activity.

HMRC has admitted that some firms will keep a lower proportion of the VAT they collect from their customers under the scheme but also pointed out that they would benefit from paying less VAT and from paying the lower rate on their expenses.

The Treasury has said that five of the 55 flat rate business categories have stayed the same as they were considered to be too generous.

A spokeswoman added: “The new rates in the flat rate scheme fully reflect a standard rate of VAT at 15 per cent. Overwhelmingly the rates – which range between 2 per cent and 11.5 per cent – have gone down, and in the remaining cases stayed the same. What’s more, this is a completely optional scheme that allows businesses to reduce their compliance costs.”