Pubs, clubs and restaurants will be allowed to continue trading at 15% VAT after midnight on New Year's Eve until 06:00 GMT.
Financial Secretary to the Treasury Stephen Timms expressed the government's recognition that making all the necessary changes to begin selling at the old rate of 17.5% would be complicated.
He added that the "New Year's Eve celebrations are a vital source of income for many in the service sector" and that they would be given until the early hours of 1 January to make the transition.
The arrangement will also apply to telecommunications companies charging for calls and text messages.
VAT was reduced on 1 December 2008 and is scheduled to return to the standard 17.5% on the first day of 2010.
Products that have remained unaffected by the change include most foods, newspapers, magazines, public transport and books, with a reduced VAT of 5% imposed on certain products such as fuel and children's car seats.
New Year's Eve VAT to remain at 15%
