This means that cash businesses which currently calculate their VAT using the VAT fraction of 3/23 should, from 1 January, use the new (old) VAT fraction of 7/47.
Cash Sales
If the business is a retailer making mainly cash sales to customers not registered for VAT (e.g. a shop, restaurant, takeaway, hairdresser), the new rate applies to all takings received on or after 1 January 2010, except where the customer paid for something they took away or was delivered, before 1 January. In this case, the sale took place before 1 January and the old rate of 15% is applicable.
HMRC have agreed that businesses such as pubs, restaurant and hotels that are open over the night of 31 December 2009 to 1 January 2010 can treat all takings spanning the change of rate at the 15% rate. This will cover the time they are actually open or 6.00 am whichever is the earlier.
Invoicing
If a business sells mainly to other VAT-registered businesses and has to issue VAT invoices, the new rate applies for all VAT invoices that are issued on or after 1 January 2010 except where:
• goods or services are provided more than 14 days before the issue of the VAT invoice. For example, if a VAT invoice is issued on 1 January for goods or services provided before 18 December 2010, or
• the invoice was paid before 1 January.
In these cases, the sale took place before 1 January and the old rate of 15% is applicable.
Special Rules to Bear in Mind
In addition to the above there are, however, special rules for supplies which span the change of rate. Under these rules if a business provides goods or performs services before 1 January 2010 and raises a VAT invoice after that date it can choose to account for VAT at 15%. There is no need to tell HMRC if you do this.
For continuous supplies of services, such as leasing of equipment (e.g. computers), a business should account for the VAT due whenever it issues a VAT invoice or receives 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.
General Rule
The normal rule is that a business should account for VAT on a deposit or pre-payment at the rate in force when you receive it. If a business receives a deposit before 1 January 2010 for goods or services that will be supplied on or after that date, the 15% rate of VAT will apply to the deposit and 17.5% will apply to the balance. A business does have the option to charge 17.5% on the deposit which may simplify matters if the customer can recover the VAT
A business may make a single supply of a service which is nevertheless carried out over a period which commences before 1 January 2010 but is not completed until after that date (e.g. decorating a house).
Unless the business has 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. However, it may charge VAT at 15% on the work done up to 31 December 2009 and 17.5% on the remainder. The supplier will have to be able to demonstrate that the apportionment between the two amounts accurately reflects the work done in each period.
Practical Tip
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.
Andrew Needham
