From 4 January 2011 the standard rate of VAT will rise from 17.5% to 20%. Here's a quick summary covering questions you might have.
What difference will it make?
The VAT hike from 17.5% to 20% will add £2.13 to the price of a £100 item. While the increase looks minor for small purchases, it starts to mount up on big ticket items - for example, it'll increase the cost of a £15,000 car by around £320. I've revised the VAT Calculator to show how the VAT rise will affect any price you enter.
Government projections estimate the increase will bring in an extra £12-13 billion of tax revenue a year.
When will it take effect?
The new 20% VAT rate will apply to all purchases made from 4 January 2011. Purchases paid in full before then will be at the current 17.5% rate, even if the goods are delivered later on. If you pay a deposit before 4 January and the balance thereafter, then the deposit will attract VAT at 17.5% and the balance at 20%.
Utility bills currently subject to 17.5% VAT, e.g. phone and Internet, will charge VAT at the prevailing rate when the calls etc were made, even if the bill is sent after 3 January, but fixed costs such as line rental will be taxed at the prevailing rate when the bill is sent.
Note, Tuesday 4 January 2011 follows a bank holiday weekend, so you might need to pay by Friday 31 December if you're trying to beat the deadline.
Can I avoid the rise on payments due after 3 January next year?
Only if you pay the balance in full before 4 January. But think carefully before doing so - it's usually a bad idea to pay for expensive goods or services in advance. If you pay for a car before it's delivered you'll have less clout if there's a delay or problems on delivery. And I wouldn't feel comfortable paying a builder in full upfront.
Is VAT added to everything?
No, some items are exempt including books, magazines and children's clothing. Most food is exempt too, except for treats like chocolate, crisps and ice-cream :-(.
Other items are subject to VAT at a lower 5% rate, including: electricity and gas for residential use, home energy saving materials, children's car seats and sanitary towels. The 5% rate will remain unchanged.
Will there be more VAT rises in future?
If the Government remains strapped for cash and thinks it can get away with a further VAT rise (without hurting spending too much) then I wouldn't rule it out - 12 EU countries already levy sales tax in excess of 20%.