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Emergency Budget 2010: VAT to rise

As had been expected, the Chancellor has chosen to raise the basic rate of VAT, from 17.5 per cent to 20 per cent.

The change takes effect from 4 January 2011.

The move brings the UK rate in line with that of the EU average.

The 2.5 per cent increase should boost government income by as much as £13 billion a year.

There had been speculation whether the Chancellor would introduce an increase in one step or stagger it across several years.

The one-step introduction will mean a quicker rise in government income, while also saving businesses the administrative costs of managing rises on a yearly basis.

Zero rates supplies, such as food, books and children's clothing, exempt supplies and reduced rate items are not affected by the change.

The cash accounting and the annual accounting VAT schemes are also not changed.

However, flat rate scheme rates have been recalculated to take the increase into account.