UK VAT rate: Guidance issued on UK VAT rate change

Most businesses face having to alter the VAT rate that they use at midnight on 31 December 2009, since the U.K. VAT rate will be changing to 17.5% on 1 January 2010. However, the U.K. tax authorities (HMRC) have confirmed that pubs, clubs and other retail outlets that will be trading overnight on 31 December will not have to change the VAT rate they use midsession (confirming the 15 May announcement of a "period of grace"). Eligible businesses will be allowed to continue using the 15% rate until they close, or until 6 am on 1 January 2010, whichever comes first. Telecommunications businesses also will be allowed to use the 15% rate for charges for calls and text messages until 6 am on 1 January 2010.

Some businesses may be able to benefit from the "light touch" that HMRC intends to take for errors relating to the rate change that are made on the first return after 1 January 2010. Unless there is a potential revenue cost (e.g. if the customer cannot reclaim all the VAT charged), HMRC will not seek an adjustment if, for example, a business incorrectly charges 15% VAT instead of 17.5% in relation to a supply made after 1 January 2010 and accounted for on its first VAT return after that date. The HMRC announcement also mentions a consultation by the Department for Business, Innovation and Skills on a proposal to extend (from 14 to 28 days) the period within which retailers can deal with price adjustments following the VAT rate change by way of a general notice that adjustments will be made at the till. That consultation closes on 23 November.