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VAT rise one-year anniversary: What was the impact?

VAT rise one-year anniversary: What was the...

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This week marks the one-year anniversary of the VAT rise to 20%. In a statement, PwC's chief economist John Hawksworth said that although the increase temporarily added around 1% to the level of prices in 2011 it should not adversely impact growth or inflation in 2012 or beyond.

What are your thoughts on the effects of the rise? 

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By frustratedwithhmrc
05th Jan 2012 11:50

Two of my clients have de-registered for VAT

I've already had two of my clients cut back their businesses to below the VAT threshold so that they no longer have to charge VAT on their sales, which are primarily to consumers rather than business-to-business.

One of them (a monumental stonemasonry business) is a prime example of why such high rates of VAT are self defeating.

Although the difference in net profit before and after de-registration is down about £13k, he's finding his sales process much easier (as he is 20% cheaper than his larger VAT charging competitors) and he's working about 75 hours a month less (about 150 hours versus 225 hours previously).

The only downside is that he can no longer offset his input VAT on cost of materials, the vast majority of his costs being labour (his own and employees).

So we have created a circumstance where we have a small company deliberately reducing its turnover by an enforced contraction since the marginal costs of operating within a VAT regime at 20% make trading very difficult, especially within the current tough business operating environment, which can best be described as stagnant verging on recessionary.

So consumers win as his prices are lower, owner/operator wins as he has more time albeit at a cost of £13k worth of divies, taxpayer loses as there is less VAT (£13,400) and less Corporation Tax (£3,240).

Obviously the client will have to keep a close watch on his turnover to ensure that during any rolling 12-months he doesn't exceed £73,000, but apart from that it seems an easy trade-off.

This does not however help UK GDP and growth rates, if otherwise viable businesses are deliberately hobbling themselves due to high rates of VAT.

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By WhichTyler
05th Jan 2012 11:51

Whole picture

If he is working 33% less, it may suit him, but suggests that customers are going elsewhere, so the net loss to the exchequer may be less than you suggest.

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Replying to Democratus:
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By frustratedwithhmrc
05th Jan 2012 12:07

Some sales will disappear out due to the additional costs

WhichTyler wrote:

If he is working 33% less, it may suit him, but suggests that customers are going elsewhere, so the net loss to the exchequer may be less than you suggest.

Not necessarily. A lot of the work is upkeep and repair - for example refitting gravestones after being deliberately toppled by vandals working for the local council.

http://news.bbc.co.uk/2/hi/uk_news/politics/7712066.stm

Although some of the work may go to Co-operative Funeral Services and similar large companies offering the same services, much of the work may not get done at all. This is because the larger companies tend to charge far more than my clients small company and then charge 20% VAT on top. A comparable service from a larger company might be double the price charged by my client.

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By WhichTyler
05th Jan 2012 12:26

Market forces?

Which suggests there is an opening for another s/e stonemason in the area who can undercut the big boys, or for a neighbouring one to expand, so more competition for your client.

Turning your back on the market is risky at the best of times, it might better be seen as a chance to sell some of the business/take on a partner?

PS if he is half the price of the competition, how is a 1% increase in his charge a killer?

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Replying to davidwinch:
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By frustratedwithhmrc
05th Jan 2012 13:50

Not all businesses can afford to absorb these additional costs

WhichTyler wrote:

PS if he is half the price of the competition, how is a 1% increase in his charge a killer?

It isn't a 1% increase, at least not for his business, although I can understand that many other businesses have absorbed the cost of the VAT rise just to stay alive, which is why we're only seeing a marginal impact.

However, it is a tax increase on top of already increasing costs for raw materials along with a general squeeze on consumers and what they are able to afford to pay in these straightened times.

Whereas previously, it might have been a matter of some pride to be able to restore grannies grave to its former glory, now for most families it is an extravagance that they might not be able to afford.

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By Steve Holloway
05th Jan 2012 14:41

The VAT increase was still the best option to raise money.

When Labour cut it by 2.5% many critics pointed out that it was a very expensive measure that produced little by way of benefit to the consumer or economy as a whole. Retaliers tended to absorb the reduction and unless a consumer was about to buy a car then they were not going to really notice any difference in their pocket.

The converse must also be true therefore? Retailers take a hit and nobody notices much of a difference. Compare that to any of the other ways to save £15bn a year in one hit!

 

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By pauljohnston
09th Jan 2012 11:51

One side effect

is the cash flow advantage albeit short term until the VAT bill arises.

There is no doubt that the increase in the VAT rate has helped those businesses under the threshold.  Particularly those dealing with the end consumer.

It is a sad time when the Government has to raise Revenue by increasing taxes.  But this has been going on since the first world war so why change now.  One would think with the increasing numbers in the UK that the costs of government would fall with economies of scale.  But I am not sure that civil servants etc understand this part of economics.

 

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By Edward Beale
09th Jan 2012 12:26

You might like to go to this blog post (http://markwadsworth.blogspot.com/2012/01/more-inflation-vat-fun.html) to see an attempt to analyse the effect of the VAT increase on inflation.  It suggest that most of the VAT increase was absorbed by businesses and not passed on to customers.

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By Roland195
09th Jan 2012 12:52

Not the rate that is the problem

In the context of small owner managed businesses, I believe the problem is not so much the rate of VAT but the way in which entities become liable to charge it after an arbitrary turnover threshold.

For a business who cannot directly pass on VAT - cafes, hairdressers, tradesmen etc there is a distinct disincentive to trade at anything over £73,000.

This lack of growth (unless they are willing to accept lower profits in the years it takes to grow to a level that this effect is counteracted) will manifest most obviously in the fact that these businesses will employ no-one.

There may be an argument for abolishing the turnover exemption altogether.

 

 

 

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By vat2concern
09th Jan 2012 12:56

Vat and registration

My client, a farmers wife operating a B&B in the farmhouse, found that her turnover declined 43% last year, after the imposition of the 20% vat rate. As its 4*; to retain the grading the accommodation has to be upgraded annually: the net profit is now insufficient to do this. The majority of the competition is not registered for vat. 17.5% was manageable, how she is to survive I do not know. 

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By pauljohnston
09th Jan 2012 13:23

Threshold

Either this has go so every business is VAT able or the threshold need to be much higher, perhaps £125,000 otherwise the problems above will continue.  Dare I mention cash jobs these will increase. to keep turnover below £73000.

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By frustratedwithhmrc
09th Jan 2012 14:08

I doubt the VAT Threshold can be moved substantially

There is a wide variation of VAT Thresholds across the EU, varying from Romania at €27,123 to Austria, France, Germany, Luxembourg and Netherlands on €100,000. The UK is towards the top of the group at around €88,000 depending upon exchange rates.

It would be difficult for the UK to increase its VAT threshold above €100,000 without claims from our European partners about unhealthy tax competition (especially France).

However, as with all taxes where a threshold exists, you do get a big disconnect around the VAT threshold where businesses who are just over the threshold versus those who are just under the threshold have very different levels of profitability, solely because of the marginal VAT.

One potential solution would be to align the VAT threshold at a GBP equivelent level to our trading partners, so increase it to £82,000 (€100,000) and adjust it only when there is a significant move in the value of the £ and only ever upwards.

This would still discriminate against some businesses, but the more that are under the VAT threshold, rather than over it, the better as this would prevent some of the behavioural responses that we see at the moment.

It also has to be admitted that some clients have deliberately understated their turnover just to remain below the VAT threshold.

CountryThresholdCommentsRomania€ 27,123 Hungary€ 27,970 Latvia€ 34,369 Belgium€ 35,000 Cyprus€ 35,000 Estonia€ 35,000 Finland€ 35,000 Greece€ 35,000 Ireland€ 35,000 Italy€ 35,000 (€27,889 prior to 2010)Malta€ 35,000 Portugal€ 35,000 Slovak Republic€ 35,000 Slovenia€ 35,000 Spain€ 35,000 Poland€ 35,594 Bulgaria€ 35,792 Lithuania€ 36,193 Sweden€ 36,244 Denmark€ 37,663 Czech Republic€ 44,042 United Kingdom€ 88,000 Austria€ 100,000 (€35,000 from 2011)France€ 100,000 Germany€ 100,000 Luxembourg€ 100,000 Netherlands€ 100,000 

  

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By The Black Knight
09th Jan 2012 15:33

Pressure on cash jobs

Has definitely increased...and each previously honest tax payer that submits to save his business increases that pressure.

Most of government policy is directed to achieving very small one man bands and restricting growth, That initial expansion comes with poverty trap expenses and cash flow issues,....Vat registration...employment legislation.....Payments on account.....health and safety....Tax credit claw backs...etc etc....ONLY the brave would expand....and on top of that the government may suddenly change the rules next week ...so you cannot make any decision.

And relies on Freud's theory that one will avoid the pain rather than seek the pleasure...

What a mess !

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