The standard rate of VAT goes up to 20% on the 4th January 2011

Some customers will be keen to take advantage of the old rate for new work. If they pay for work in advance before 4 January 2011 the rate is 17.5% even though the work will not be done until after 4 January 2011.

Alternatively, if you invoice before 4 January 2011, and the invoice sets a payment date before 30 June 2011, the rate is 17.5% even if the work is to be done after 4 January 2011.

If the customer does not pay in advance, and you do not want to raise an invoice in advance with or without a delayed payment date, the other option available is to measure the work done up to the end of 3 January 2011, and work done after 3 January 2011, and to invoice each half of measured work at the rate appropriate for the period in which it was completed.

You will also need to check that VAT on invoices that you are asked to pay is at the correct rate.  The usual rule is that the rate of VAT is fixed by the date of invoicing or the date of payment whichever comes first.

If the supply was made in 2010 but the invoice was not raised until 2011, and you made no payment in advance the rate will be 20%.  If the supply was made in 2011 but you paid in 2010 before supply and invoice the rate is 17.5%.

However if both you and the supplier are VAT registered traders, HMRC are unlikely to query or object to small payments invoiced and paid at the wrong rate for work that straddles the period where there is no deliberate manipulation.

As the year goes on, take care with releasing retentions. Where the work was done in 2010 it can still be invoiced at 17.5% and this is useful when asking for retention from a domestic customer. VAT registered traders releasing retentions to other VAT registered traders may prefer to use 20% and this is also acceptable.

Liz Bridge, FMB Taxation Helpline