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.
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.
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.
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.
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.