VAT rate increase - shoppers may see price rises

With the standard rate of VAT set to increase to 20% from the current 17.5% it is a good idea to be aware of the rules on the correct rate of VAT you should be charged on purchases around the busy New Year period.

When buying goods or services on or after 4 January from a retail business such as a shop, restaurant or hairdressing salon, all purchases should be subject to 20% VAT.

Businesses that are passing the VAT increase on to customers will increase their current prices by just over 2%. The exact calculation is 120/117.5. It is up to each individual business to decide whether it wants to pass the VAT increase onto its customers in this way.

If however you pay for something you have taken away (or the supplier has delivered) before 4 January 2011 then the sale took place before 4 January 2011 and you should be charged VAT at 17.5%.

It is common for retailers to give refunds, particularly in the period after Christmas. If you are given a refund on or after 4 January 2011 for a sale made before 4 January 2011 this will be made at the old VAT rate.  If you want to exchange goods, for example a jumper for another size or colour, you may find the gross cost has increased and you have to pay more. The replacement item will have been sold at the new VAT rate.

Internet link: HMRC website

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