On the 1st January 2010, the standard rate of VAT reverts to 17.5%. Any goods or services sold at the standard-rated on or after this date VAT must be charged at 17.5%. Businesses can revert to calculating their VAT using the VAT inclusive fraction of 7/47.

Special rules for sales spanning the change over
There are optional rules governing the change of rate that may be of interest to certain businesses. The rules may be applied to different customers on a selective basis.

Example 1
if you issue a VAT invoice after 1 January 2010, for services completed or for goods provided before 1 January 2010, you can apply VAT at the 15% rate. These rules can be applied even after you have issued your invoice showing VAT at 17.5%. If you opt to do this you must issue a credit note refunding the difference in VAT of 2.5 within 45 days of the rate change. Do not cancel the original invoice.

Example 2
A new desk is delivered to a business customer who is VAT registered and one to a non-business customer on 21st December 2009; at this point in time the applicable standard rate of VAT is 15%. After the New Year holidays staff return on 2nd January and raise VAT invoices for the two sales. The question that must be answered here is what is the applicable rate of VAT?

Under tax point rules VAT is due at 17.5% as the invoice was issued after the rate increase and within 14 days of the supply. However, the special rules allow the supplier to charge VAT at the old  standard rate of 15%, the rate in effect when the desk was delivered.

This will mean that the supplying company will have less VAT to pay over at the end of their quarter. AS the business customer is VAT registered, they will be able to claim back any VAT paid out by them and thus the special ruling will not affect them. The non-business customer will gain, as they cannot claim back the VAT. There will be a good chance that this customer will expect to pay VAT at 15% as this is when they purchased.

Services in progress
In some situations the provision of a service may commences before 1st January 2010 but still be in progress after that date. Normal rules would dictate that where an invoice is issued or payment received after 1st January 2010 VAT should be charged at 17.5% despite the fact that some of the supply would have been made at the 15% rate. Under the special rulings which apply both to continuous supplies of services (eg leasing of equipment) and to single supplies (such as a plumber installing central heating), carried out over a period.

Payments made in advance
Payment made prior to 1st January 2010 for goods and services supplied before that date, attract the old standard rate of 15%. However, where goods or services are supplied on or after 1st January 2010 special anti avoidance rules may apply.

Disclaimer - for information of users: This newsletter is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this newsletter can be accepted by the authors or the firm.