Do not Forget the VAT

Starting from 1 January 2010 new VAT rates apply. Shifting from 15% in 2009 to 17.5% in 2010 is not as simple as it might look on the surface, so I am planning on the series of articles to help you deal with it.

HMRC has provided a detailed guide along with several PDF documents linked from the same webpage to help businesses that need to be particularly careful with the shift. These businesses include:

• Retailers
• Businesses that issue VAT invoices
• Businesses operating beyond midnight on 31 December 2009

For each of these categories HMRC provides a separate PDF document available online. There are also certain types of services that require special attention to the changing VAT rates. They include:

• Services you start before 1 January 2010 but finish afterwards
• Continuous supplies of services

Some brief explanations are given below.

Retailers

It seems obvious that you should use the 17.5% rate for all takings you receive on 1 January or after that date. But... here comes a but. Supposing a customers pays you after 1 January for something delivered (taken away) before that date. In this case, the 15% rate applies.

Businesses that issue VAT invoices

All invoices issued on or after 1 January should use the 17.5% rate. But we strongly recommend that you look through this PDF document to learn certain special rules, including the rules covering deposits and pre-payments.

Businesses operating beyond midnight on 31 December 2009

These businesses (e.g. pubs and clubs) are allowed to use the 15% rate until they close or until 06:00, whichever comes sooner. HMRC has also introduced special arrangements to help such businesses, about which you can read on its website.

Services

For "Services you start before 1 January 2010 but finish afterwards" and "Continuous supplies of services" (such as leasing of photocopiers) the same basic rule applies: you are allowed to use the 15% rate for the services provided before 1 January 2010, and the 17.5% rate for work done/services provided after that date. In both cases HMRC state that you "will have to be able to demonstrate that the apportionment is fair".

The guide provided by HMRC also explains certain additional issues that may arise in connection with the VAT rate change, including how to correct VAT charged at the wrong rate (there might be a lot of wrong invoices sent considering the complexity of the issue), how to complete your VAT return and how the special VAT schemes for small businesses are going to be affected. Special attention must be paid by small businesses using the Flat Rate Scheme, which hasn't been finalised yet, but will be finalised and published towards the end of 2009.

Change in the VAT rate is not the only change of VAT rules to take place in 2010. Other changes will be explained in detail in the future articles.