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Budget 2009: VAT to return to 17.5% next year

22nd Apr 2009
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All the cynics were predicting a big hike in VAT at the end of the year to help the Chancellor balance the books – but not so. The Budget proposal is to return the standard rate of VAT to 17.5 per cent from 1 January 2010. It seems that even in the current economic state, the Government could not stomach an unwelcome increase in VAT just after Christmas and so close to a general election! The 2.5% increase is going to be hard enough to implement, and one suspects that many retailers will be under intense pressure to absorb the cost rather than passing it on to consumers.

Zero rated supplies, such as basic foodstuffs, children’s clothing and books; exempt supplies, such as education and health; and supplies subject to VAT at 5 per cent, such as domestic fuel and power, will not be affected by this change.

The cynics will, of course, want to point out that the Chancellor still has his autumn Pre-Budget Report to have another look at this and possibly increase the basic rate above 17.5%, so it’s not entirely a ‘done deal’.

For those already looking for ways to avoid or delay the impact of the VAT increase, we also have advance notice of the anti-forestalling legislation to be introduced in FA 2009 to prevent suppliers contriving to fix the VAT rate at 15 per cent even though the goods are not due to be delivered or services to be performed until 2010.

There will be a supplementary VAT charge where the customer cannot recover all the VAT on the supply (for example because they are wholly or partially exempt) and one of the following conditions is met:
• the supplier and customer are connected parties; or
• the supplier funds the purchase of the goods or services (or grant of right); or
• a VAT invoice is issued by the supplier where payment is not due for at least six months.

A supplementary charge will also apply where a pre-payment of in excess of £100,000 is made before the rate rise in respect of goods or services (or in relation to the grant of the right to receive goods or services) to be provided on or after the date of the rate rise. However, it will not apply if the prepayment is in accordance with normal commercial practice in relation to such supplies when no VAT rate increase is expected.


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