Get ready for the January VAT increase
23 November 2009
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Just when you got used to VAT being charged at 15%, the time has almost come for the rate to change again. From 1 January 2010, the sale of standard-rated goods or services should be charged at the new rate of  17.5%. Here, we take a look at the various scenarios you may come across at this time and how to apply the change in each case.

Tip: If you currently calculate your VAT using the fraction 3/23, from 1 January 2010, use the new fraction of 7/47.
Retail
 
If you run a retail business which mainly makes cash sales to customers not registered for VAT (e.g. a shop, restaurant, takeaway, hairdresser, etc.) the new rate applies to all takings that you receive on or after 1 January 2010.
 
Except for where your customer pays for something they took away (or you delivered) before 1 January. For example, where customers have an account with you. In this case, your sale took place before 1 January and you must use the old rate of 15%.
 
Business to business sales
 
If you are a business that sells mainly to other VAT-registered businesses and have to issue VAT invoices the new rate applies for all VAT invoices that you issue on or after 1 January 2010.
 
Except for where:
  • you provided goods or services more than 14 days before you issue the VAT invoice. For example, if you issue a VAT invoice on 1 January for goods or services provided before 18 December 2010, or
  • you were paid before 1 January.
In these cases, your sale took place before 1 January and you must use the old rate of 15%.
 
What happens if the supply spans the change of rate?
 
Under special change of rate rules, if you provide goods or perform services before 1 January 2010 and raise a VAT invoice after that date you can choose to account for VAT at 15%. You don't need to tell HMRC if you do this.
 
However, if you make a single supply of a service which is carried out over a period which commences before 1 January but is not completed until after that date (e.g. decorating a house) and unless you've received payment or issued a VAT invoice before 1 January, the whole supply should be charged at the 17.5% rate under the normal rules.
 
But you may, if you wish, charge VAT at 15% on the work done up to 31 December 2009 and 17.5% on the remainder. You'll have to be able to demonstrate that the apportionment between the two amounts accurately reflects the work done in each period.
 
Continuous supply of services
 
For continuous supplies of services, such as leasing of equipment (e.g. computers), you should account for the VAT due whenever you issue a VAT invoice or receive payment, whichever is the earlier. In these cases, invoices issued or payments received on or after 1 January will be subject to 17.5% VAT.
 
The normal rule is that you should account for VAT on a deposit or pre-payment at the rate in force when you receive it. If you receive a deposit before 1 January for goods or services that you will supply on or after that date the 15% rate of VAT will apply to the deposit and 17.5% will apply to the balance. You do have the option to charge 17.5% on the deposit which may simplify matters if your customer can recover the VAT.
 
Note: HMRC will be operating a 'light touch' in dealing with errors made in the first VAT return after the change, where the error relates to a change of rate issue.
 
 
About the author
 
Andrew Needham is the FPB's tax adviser, a Director of VAT Specialists Ltd and a member of the Chartered Institute of Taxation. Visit www.vatspecialists.net for further information


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