What rate of VAT do you charge if you are halfway through completing a tax return or serving a drink at midnight on 31 December 2009?

HMRC is bringing in two measures to help businesses cope with the change back to the 17.5% rate of VAT.

These are:

  • Special accounting arrangements for businesses operating beyond midnight on 31 December 2009;
  • The 'light touch' to be operated by HMRC audit staff in dealing with errors arising out of the rate change.

Special accounting arrangements:

If you are still half-way through a client’s tax return at midnight on 31 December 2009, don’t worry you don't have to bill your client at different VAT rates. The position is more difficult if you are serving drinks or food.

Special accounting arrangements will apply to businesses that are open that midnight which account for VAT at the point of sale such as businesses on a retail scheme - pubs, shops, restaurants etc. HMRC will allow them to account for VAT at 15 per cent on takings received up to the earlier of:

  • the end of trading of the 31 December session or
  • 6am on the morning of 1 January 2010.

These arrangements will not apply to:

  • Mail order or on-line retailers;
  • Businesses that account for VAT on the basis of VAT invoices issued; or
  • Pre-payments for supplies of goods or services to be provided after 6am on 1 January 2010.

Light touch

Where an error relates to a change of rate issue, HMRC will not seek an adjustment unless there is an overall revenue loss.  Where a business discovers that it has made material mistakes, it should correct them through the normal error correction process.

The error correction reporting threshold applies to net errors that are the greater of:

  • £10,000
  • 1 per cent of the Box 6 figure required on your VAT Return for the period when you discover the error - subject to an upper limit of £50,000 or above which must be reported to HMRC.

If the value of the net VAT errors discovered is above this threshold, you must report them to HMRC separately. Note also that the new tax penalty regime applies to VAT errors incurred after 1 April 2009.

Source: HMRC VAT Brief 68/09

In passing: VAT and prices
Traders are required to display clearly the prices inclusive of VAT. For a period up to 14 days, traders are permitted under the Price Marking Order 2004 (SI 2004/102) to let consumers know, by way of a general notice, that an adjustment in price, to take account of the VAT change, will be made at the till. The Department of Business Innovation & Skills (BIS) is currently consulting as to whether this rule should be amended.