Revenue to put up VAT on January 1

HM Revenue and Customs has confirmed to tax experts that the rate of VAT for most firms will revert to 17.5% on January 1 2010, in spite of pleas for a postponement.

HMRC said that all business who apply the standard rate will be affected by the move from the date, other than those trading through the night, such as pubs and clubs.

Advisors to this small minority of businesses say that, even then, the grace period that they can expect from HMRC is only likely to last a few hours after the deadline.

From the first week of January, then, all businesses who charge VAT at the standard rate will have to have new or amended resources in place to reflect their higher prices.

Although HMRC has issued new guidance on the VAT reversal, these changes to put it up will cost firms about £125m, on top of the £175m they have already spent lowering it.

Business groups say New Year's Day is not the right time to land firms with a hefty administration bill, arising from them needing to change pricing or invoicing systems.

And economists fear that getting rid of the lower rate of VAT, which has so far had little or no effect on the public's spending, could hurt consumer confidence at a time when it appears to be returning.

But George Bull, of accountancy firm Baker Tilly hinted that the questionable effect of the VAT cut, as an economic stimulus, was one reason why it always looked set to be cancelled on schedule.

"This has come as little surprise to many given that the most recent indications are that the decrease has had little impact on consumer spending," he told the Financial Times.

"However, for those campaigning for a postponement to the VAT rise, the refusal to extend the period has come as significant disappointment."

Reflecting on the changes facing standard rate VAT businesses, accountants at the MHH Partnership said: "You should also be aware of the targeted legislation which was introduced in the 2009 Finance Bill to counter any avoidance schemes that seek to take advantage of the 15% rate for supplies of goods and services after 1 January 2010."