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Pre-Budget Report 2008 - VAT

As widely reported, the PBR today has confirmed that the standard rate of VAT will be cut to 15% with effect from 1 December 2008. (The new VAT fraction to be applied to VAT inclusive prices will be 3/23).

This means that standard rated supplies of goods and services made after this date will attract the new rate of VAT. Supplies at the zero or reduced rates and exempt supplies are not affected. The new rate will remain in place for 13 months till 1 January 2010, when it will rise again to 17.5%. (Anti- forestalling legislation will be brought in to prevent planning around the subsequent rate increase).

For sales spanning 1 December, special tax point rules mean that businesses can choose to charge VAT at the new rate on goods removed and services performed after the rate change, even if payment has already been received or VAT invoices issued. In those cases, credit notes will have to be issued to correct the VAT overcharged.

Special rules will apply to retailers, those providing continuous supplies of services (e.g construction industry) and other special schemes (second hand dealers etc). Detailed guidance on how to deal with the change is available on HMRC’s website.

The reduction in the standard rate will also amend the rates applied under the Flat Rate Scheme for small businesses. The revised percentages are published on HMRC’s website.

Other VAT and duty changes announced are;

  • Increase in threshold for Bespoke Retail Schemes with effect from 1 April 2009.
  • Simplification of the entry and exit rules for VAT Flat Rate Scheme with effect
    from 1 April 2009.
  • Payment arrangements for those having difficulties paying VAT bills via the “Business Payment Support Service”.
  • Increases in fuel/alcohol and tobacco duty.

The Chancellor has urged retailers to pass on the rate cut “as quickly as possible”. In reality, businesses may choose not to pass on the cut. They are unlikely to welcome it as it will cost them to implement changes to prices /accounting and point of sale systems. In the retail sector, where prices are already being heavily discounted, it is hard to see that a further 2.5% cut will have much of an impact on sales turnover.



Date: 25th November, 2008
Author: Jane Stacey


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