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PBR 2008: VAT rate cut to 15%

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24th Nov 2008
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As widely predicted before the Pre-Budget Report, the Chancellor confirmed that the standard rate of VAT is to be cut by 2.5% to 15% - the lowest level allowed under EU law - with effect from 1 December 2008 in a bid to get consumers spending again. The reduction will apply for 13 months, returning to 17.5% from 1 January 2010. The new VAT fraction will be 3/23.

Only standard-rated sales are affected. There are no changes to sales that are zero-rated or reduced-rated for VAT. Similarly, there are no changes to the VAT exemptions.

Described by the BBC as “part of an emergency package aimed at kick-starting the economy”, this is part of the package which Gordon Brown was referring to when he promised "substantial" measures in the PBR to stimulate economic growth.

The CIOT estimates that those earning £20,000 or less per year will save about £2.50 per week in VAT, which they could spend on extra goods and services. Those on higher incomes of £60,000 per year or above will have about £6.50 per week more to spend, again if they spend the same way and the same amount as before.

Andrew Hubbard, CIOT Deputy President, says: “The CIOT had previously commented that VAT is one tax measure that is quick to introduce and was a likely candidate for use if the Government wished to embark on a fiscal stimulus. Whether it achieves its aim depends in a large part on the response by businesses and consumers. They have no legal obligation on them to pass on the benefits of the VAT cut to consumers, whether in whole or part of a rate reduction.”

Confidence effect or confidence trick?

Duties on fuel, alcohol and tobacco will be increased from 1 December 2008 to offset the VAT reduction, so consumers will feel only a minimal benefit in the run up to Christmas while businesses running cars and commercial vehicles will probably be worse off in net terms! BBC political editor Nick Robinson said that “the VAT cut is designed to have a ‘confidence effect’, even if the impact on people's finances is not necessarily huge.”

AccountingWEB readers were completely unimpressed by the reduction in the standard rate, calling it “madness” and criticizing it as “untargeted”.

At a time when businesses are finding their cashflow under increasing pressure some were hoping that the Chancellor would announce extra time to pay VAT bills, picking up a proposal made by David Cameron. This looks to have been a step too close to Tory policy so the one month payment deadline remains unchanged.

Flat Rates reduced

Small businesses using the VAT Flat Rate Scheme may now need professional advice to work out if it is still worthwhile using the scheme. Most (but not all) of the Flat Rate percentage rates have been reduced from 1 December 2008, but generally not by the full 2.5%.

Bookkeeping nightmare

The reduction is also likely to cause problems for bookkeepers. For example, the 14 day rule means that the old rate of VAT will still apply to invoices issued in December 2008 where goods were supplied more than 14 days before the invoice date. The old rate also applies if payment was made in advance before 1 December. Credit notes against old invoices will need to apply the original VAT rate, not the new one.

All this means calculation challenges for both manual and computerized accounting systems. A reduction in the VAT rate is unprecendented so there is no track record to demonstrate how computer systems will cope. This is particularly concerning where businesses use cash accounting, where over the next few months VAT will have to be accounted for at both 17.5% and 15%. If, for example, receipts and payments are not allocated against unpaid invoices as they are entered the software will almost certainly calculate VAT at the wrong rate.

Cash registers and electronic tills may need to be reprogrammed for next Monday – another task which has probably never been undertaken before. How many traders know where the instruction manual is?

Looking ahead

There are potential cashflow problems for some businesses which will struggle to pay the 17.5% VAT due for VAT quarters including periods up to 30 November 2008 over the next few months while collecting only 15% from their customers.

Looking ahead for potential problems, the Government proposes to introduce anti-forestalling legislation in Finance Bill 2009 to ensure that businesses are not able to use artificial arrangements to reduce the VAT rate on goods or services to be provided after 31 December 2009 when the rate reverts to 17.5% where there is no current economic activity.

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Replies (10)

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By kendene
26th Nov 2008 20:01

VAT cut good news for Banks
The cut in the VAT rate will actually be a piece of good news for banks, who being zero rated have to account their costs as gross of VAT so leading to a direct reduction in their cost base and leading to an increase in bottom line profitability. I suspect that this will not help to restore their confidence to lend again and also suspect that it is an indirect impact that the chancellor had not thought of otherwise more would have been made of it as part of the PBR!

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By mydoghasfleas
25th Nov 2008 18:33

Tills
I was just about to post a comment about the HMRC comment on tills and manual calculation but Michele Shapland said it more than adequately. The queues for the morning paper (zero rated) on 1 December will be four times as long if any one is buying cigarettes (VAT down to 15% but tobacco duty up by 4%) from a corner shop.

By the time, you have got used to the manual calculation the old rate will be back or perhaps it will be some other rate. Does anyone know which market NCR shares are traded on? PS not a real question

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By ronwelsh
25th Nov 2008 16:12

Small Businesses Worse Off
In spite of the VAT Rate cut, small businesses using the VAT Flat Rate scheme will be worse off since HMRC have rounded to the nearest half percent in their favour. So much for the chancellor wanting to help small business.

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Nigel Harris
By Nigel Harris
25th Nov 2008 15:17

Apologies
Thanks Anne and Jonathan, you're right of course. In my defence I did check the latest CCH Hardman's tax tables but they only go back to 1975!

So the good news is that anyone is still running their accounts on software they were using pre-1974 they should be OK with the rate change.

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Chris Challis
By challisc
25th Nov 2008 14:55

Implications for computer systems?
The article highlights some of the problems affecting bookkeeping and computer systems. I've set up a blog to collect other issues and tips - see www.camwells.co.uk/vatratesystems

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By User deleted
25th Nov 2008 11:15

Reduction in VAT rate
this is an extract of the guidance published on HMRC re vat reduction :"Q6 What about tills?
You may also be able to adjust your electronic till yourself – if necessary you’ll need to contact your till supplier for assistance. But don’t worry: if your till has not been amended to calculate 15% (rather than 17.5%) by 1 December you can always calculate the VAT manually.
You simply take the standard-rated gross takings calculated by your till and multiply that sum by the new VAT fraction of 3/23 – this will give you the amount of 15% VAT."

This is a joke surely. The majority of people using tills don't seem to be able to add up this days so I have vision of long queues at tills with customers having to wait to find out how much they have to pay!!!!

Another administrative burden on businesses which will prove inefficitient and a complete waste of everybody's time and money...

If he wanted to help the low paid and save on public spending then this is what he should have done:

People on low income (less £15000 per annum pay no tax/nic) at all and get an extra personal allowance for each child that they have to make up for one of the parent not being able to work or having to pay child care and scrap the farce that is tax credits. This would encourage people to go out to work rather than stay at home and take hand outs..

For pensioners: any who is entitled to the age allowance in full should not pay any tax at all and get an increase in state pension to give them a minimum income of £1000 per month.

To pay for this all MPS should all take a pay cut and stop receiving free allowances towards a second home in London. They should claim expenses like the rest of the employed population and all public servants should work until they are 65 years old like employees in private sector.

A very grumpy tax adviser


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The Business Growth Secret
By anndartnall
25th Nov 2008 10:38

Already invoiced pre-payments
I have many of my clients on standing order. They pay up-front for work either at the end of the year or during. I issue a VAT schedule/invoice for the year.

Where I am in the middle of a VAT schedule by 1st December, do I have to re-invoice with the amended rate?

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By User deleted
25th Nov 2008 08:15

better down than up
Sadly rises in VAT aren't unprecedented either. It was introduced and subsequenty raised by various Tory governments - they love a bit of it!

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By jsheard
24th Nov 2008 22:53

Maybe you weren't born then!
"A reduction in the rate of VAT is unprecedented" - NOT!

The "standard' rate of VAT was reduced from 10% to 8% in 1974.

Please keep up to date on your homework.

Jonathan

Jonathan Sheard BSC (MechE) CA CPA FCCA FIMI Realtor
General Manager/Member
Sheard, LLC
CPA, Real Estate Brokerage & Used Vehicle Dealer Services,
Dallas, Texas, USA

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By AKing
24th Nov 2008 22:19

Earlier cut in VAT?
A cut in VAT isn't quite unprecedented - I seem to recall a reduction from 10% to 8% in the 1970s.

It's just that there weren't many computers around then.

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