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Is the 2.5% VAT increase really such a big deal?

6 January 2011

Given recent media coverage, we surely all know that the standard rate of VAT was increased from 17.5% to 20% from midnight on 4 January 2011.

This will affect supplies of many goods and services and, for those who can’t recover VAT, the extra amount will be an absolute cost. It’s therefore worth remembering that:

1) a price includes VAT unless otherwise stated; and

2) there are some optional special rules for supplies made (but not invoiced or paid for) before 4 January 2011, where VAT can still be charged at 17.5%.

Those who can fully recover VAT may simply be expecting a small impact on cash flow. However, some businesses are expected to take the opportunity to increase prices by more than is strictly necessary – by as much as 8% in some cases – which could have a significant impact on everyone, regardless of their VAT status.

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