• Standard VAT rate reduction
  
• Other VAT changes
• Alcohol, tobacco and petrol duties
• Hydrocarbon oils: duty rates
• Air passenger duty (APD)
• Vehicle excise duty (VED)

Standard VAT rate reduction

In line with recent media speculation, the standard rate of VAT will reduce temporarily by 2.5% to 15% from 1 December 2008. The rate reduction is intended to be in place until 31 December 2009.

The reduction is designed to stimulate spending on the high street and the Chancellor has asked that retailers pass on the cut as quickly as possible. If passed on, the cut should be of benefit to retail consumers but partially exempt businesses (such as banks, insurance companies, education and healthcare providers etc.) will obtain almost immediate advantage since they cannot recover all VAT incurred.

However, the implementation of the changes is likely to take time and may be difficult to implement for businesses that have already set prices for Christmas (such as mail order businesses). Business to consumer businesses will need to consider whether they wish to pass on the cut to their consumers.

The implementation of the change is likely to require accounting system changes to calculate VAT at the correct rate. All invoices issued on or after 1 December 2008 should use the new VAT rate unless the business provided goods or services more than 14 days before the issue of the VAT invoice or it was paid before 1 December 2008. For continuous supplies of services, such as leasing of equipment (e.g. computers), businesses should account for the VAT due whenever it issues a VAT invoice or receives payment, whichever is the earlier. In such cases, invoices issued or payments received on or after 1 December 2008 will be subject to 15% VAT.

Special rules are being introduced for sales spanning the change of rate. If a business received a payment or issued an invoice using the 17.5% rate before 1 December 2008 for goods that will be provided (or services delivered) after 1 December 2008, the business has a choice. It can choose either to leave the VAT charged at 17.5% and account for that to HMRC, or account for VAT at 15% on the amounts already received or invoiced (without informing HMRC). The business will need to issue a credit note, and refund the difference in VAT to its customer if it has already issued a VAT invoice showing the 17.5% rate of VAT. If it has not issued a VAT invoice, it can account to HMRC for the 15%, and would normally be expected to refund the difference between the invoice and the amount paid.

Where a business receives a deposit, it is required to account for VAT at the rate in force when it receives it. If received before 1 December 2008 where goods and services are provided after that date, the business has the option of applying the 15% rate of VAT.

Finally, as the change is only temporary, an announcement is expected on 25 November 2008 on the measures the Government will introduce to prevent the use of arrangements to take advantage of the 15% rate after 31 December 2009.

Other VAT changes

Of interest to retailers will be that the threshold above which a business may not use a published retail scheme to account for VAT is to rise to £130m (the present threshold is £100m). In addition, the entry and exit tests for the flat rate scheme are to be simplified along with changes to reflect the change in the standard VAT rate.

Alcohol, tobacco and petrol duties

From 1 December 2008, the rates of alcohol duty will be increased by 8%. The small brewers’ relief scheme will continue to provide 50% duty relief to the smallest brewers.

From 6pm today, the rate of ad valorem duty on cigarettes imported into or manufactured in the UK will be increased from 22% to 24%. The rates of duty on other tobacco products imported into or manufactured in the UK will be increased by 4%.

Hydrocarbon oils: duty rates

On or after 1 December 2008:

• the duty rates for unleaded petrol and diesel will be increased by 2 pence per litre (ppl). These rates will be further increased on 1 April 2009 by 1.84ppl and on 1 April 2010 by 0.5ppl above indexation in that year.
• the duty rate for leaded petrol will be increased by 2ppl.
• the rates of duty for non-road fuels will be increased by the same percentage as main road fuels. This will include the additional rise on 1 April 2009
• the current duty differential of 20ppl for biofuels for road use will cease from 2010 and duty will thereafter be charged at the same rate as main road fuels.

Air passenger duty (APD)

From 1 November 2009, new rates of APD will be introduced based on the distance from London to the capital city of the destination country/territory. There will be four geographical bands with each band having two rates, one for standard class of travel and one for other classes of travel. The proposed aviation tax will not be introduced now.

Vehicle excise duty (VED)

The Government confirmed the introduction of new VED bands in 2009. To reduce pressures on motorists during the current economic downturn there will be no significant rate changes until 2010, and no driver in any given band will pay more than £30 more in that year.