Changing back to the old rate of VAT

On 1 January 2010, the standard rate of VAT reverts to 17.5 per cent after a period of 13 months at 15 per cent.

HMRC will allow the basic tax point to apply to goods delivered or taken away before 1 January but paid for on or after that date. Consequently, the 15 per cent rate will still apply to such sales.

It will also be possible to take deposits or prepayments before the change relating to supplies, which take place after it. However, there are anti-avoidance provisions to prevent abuse.

The trade of certain types of business will span midnight on 31 December 2009 and HMRC has acknowledged it would be unfair to expect them to stop what they are doing on a busy New Year’s Eve and change their systems to cope with an extra 2.5 per cent VAT.

They will be allowed to continue applying the 15 per cent rate until their trading session ends that night, or until 6am, whichever is the earlier. The types of business affected are: pubs, clubs, restaurants and similar retail shops and telecommunications providers.

Exempt and partly exempt businesses (and those with non-business activities, notably charities) should particularly consider taking advantage of early deliveries of goods or deposits or prepayments as explained above, where supplies received will be used in full or in part other than for taxable purposes because, by so doing, they will minimise irrecoverable input tax.

Business owners should also note that where a supply of services spans the change, i.e. it starts before 1 January 2010 but does not finish until on or after that date, the supplier may choose split his invoice to show amounts due at the two rates. As that treatment is optional, recipients of such services, whose input tax is not fully recoverable, should encourage their suppliers to take up the option.

Other businesses affected by the changes include those using the cash accounting, who must clearly identify receipts before and after the change date, and those using the flat rate scheme as percentages will revert to their November 2008 levels. All should remember that the VAT fraction for determining the VAT amount from a VAT-inclusive figure reverts to 7/47, from 3/23, and apart from gross takings, this will also affect, for example, fuel scale charges.

Changes to the flat rate scheme

The scheme allows small businesses with an annual turnover up to £150,000 to pay HMRC a fixed percentage of their turnover rather than the usual payment of output tax and recovery of input tax on actual positive rated outputs and inputs. The percentages are based on the norm for particular business sectors based on statistics available to HMRC.

The percentages were revised downwards on 1 December 2008 when the standard rate was reduced to 15 per cent. However, the changes from 1 January 2010 will not only reflect the reversion to the 17.5 per cent standard rate, but also take into account business patterns across the various sectors over the last year.

Joining the scheme is optional and businesses are entitled to leave it any time. Leaving the scheme retrospectively is at HMRC's discretion. However, HMRC have stated that they will apply this sympathetically if businesses consider it is no longer helpful to them after the changes.

Since its introduction in 2002, the flat rate scheme has generally been helpful to small businesses, so the forthcoming changes afford an opportunity for all qualifying businesses to assess its relevance to them.