Businesses registered for VAT are advised to look at their work in hand and decide whether there is the possibility of invoicing before January 4 at the lower rate.

If work is completed or goods delivered before then, the rate of VAT will be 17.5 per cent, but the invoice will need to be raised before January 14.

But businesses can choose to invoice at the new 20 per cent rate, if that makes accounting procedures easier.

Any goods delivered or work commencing after January 4 will fall under the new rate, unless payment is received in advance.

Matters become more complex with long-term contracts that straddle the January 4 date.

If the contract allows for regular payments or invoicing dates within the period of the contract, the VAT rate to be used is the one in force at the date the invoice is raised, or a payment received.

If the contract has no payment or invoicing schedule, then a tax point will only be created when an invoice is raised or a payment received.

Businesses in this position should look at work in progress and see how much could be invoiced prior to January 3 at the lower VAT rate.

The spring will also bring new penalties for late returns and payments, replacing the current Default Surcharge system.

From April 1, 2011, the first late return will trigger an immediate penalty of £100 and a penalty period of 12 months.

Subsequent late returns in that penalty period will increase by £100 per return (up to a maximum of £400) and each time the penalty period will be extended to 12 months from the latest deadline.

While taxpayers are perfectly within their rights to adjust errors up to a maximum of £50,000 (depending on turnover) via the VAT returns, such adjustments are not immune from penalties.

The penalties will not apply where there is a ‘time to pay’ agreement in place and there is the right of appeal if the taxpayer has a reasonable excuse for the lateness.

Finally, HMRC recognises VAT is complex and has produced a ‘toolkit’ to help businesses record the correct amount of input tax.

Businesses are strongly recommended to use this toolkit. Failure to do so could put businesses on the back foot in negotiations with HMRC if any errors are found in the future.

The toolkit is available to download from the HMRC website: http://www.hmrc.gov.uk/agents/ toolkits/vat-input-tax.pdf o Contact: Ruth Corkin, James Cowper, 01865 200500.Web: www.jamescowper.co.uk