As the New Year is here, VAT has bounced back to 17.5%. Trying to interpret what it means is very confusing and it is difficult to understand whether retailers are really offering a good deal. If you’re going to have to pay 2.5% more on the cost of most items, was it a good idea to buy them before the end of the year?

John Crawford at The VAT Consultancy helped me to understand and benefit from the changes over the New Year period.

What exactly is VAT and how does it affect you?

VAT is a tax that’s charged on most goods and services that the majority of businesses provide in the UK. VAT is a tax that’s charged on most goods and services that VAT-registered businesses provide in the UK. It’s also charged on goods and some services that are imported from countries outside the European Union (EU), and brought into the UK from other EU countries.

VAT is charged when a VAT-registered business sells to either another business or to a non-business customer. When a VAT-registered business buys goods or services they can generally reclaim the VAT they have paid. During 2009, the standard rate of VAT was 15%, and so 15% of the cost of most items you bought went back to the Government as tax.

If the rate was originally 17.5%, why did it go down, and why is it now going back up?

The rate went down at the end of 2008 to 15% to help stimulate the economy and encourage consumers to continue to make purchases. It was the lowest possible rate allowed by EU law but promised to only be a temporary measure to help consumers through a difficult period. Alastair Darling announced earlier in December 2009 that the rate will return to 17.5% to bring back more money into the Government to pay for the services which we use.

When did this rise take place?

The VAT rate changed from midnight on 1st January 2010 to 17.5%, and therefore many items and services that you now buy, in theory, are 2.5% more expensive. For a lot of big ticket purchases like TVs and cars, it was a good idea to purchase items last year while the rate was lower, and then collect them after the New Year to save what could be hundreds of pounds.

Why won’t items like train tickets get more expensive?

There are certain items, regarded as ‘essential supplies’ by law for which VAT is not charged, such as food (but not meals in restaurants or takeaways), newspapers and stamps as well as train, bus and air travel. So, watch out for unscrupulous retailers demanding you buy now to ‘beat the rise’! It can be worth checking online to see whether you’re paying the right amount for items.

If you bought items for a present before Christmas, but you can’t change them until the New Year, will you still get the same money back, or more because of the rate change?

You will get back the full refund for what you originally paid, even if items are now more expensive because of the rise. If you don’t have a receipt, just like any other purchase, retailers will generally either exchange the item or offer a gift card, but that is up to the individual store.

You bought gift vouchers for £35 in November. Are they now worth less?

Your voucher will still be worth the face value on it, but because prices for most items are likely to go up with the rise on 1st January 2010, you’ll get fewer products for your money.

You’ve got a bill that says the VAT rate is 5%. Is this going to go up by 2.5% as well?

Certain goods, such as domestic fuel and power, energy saving materials, sanitary hygiene products, and children’s car seats, have been classified by the Government as ‘reduced-rate’ items. The reduced-rate will stay at 5% in January 2010.

Is the VAT rate likely to change again?

The VAT rate is set by central Government, and the only other recent time it has been changed was in 1991. The VAT Consultancy predicts that we will see another rise by the end of 2010, probably to 20% but there has been no mention of this from Government as yet.