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VAT goes up to 20% from 4 January

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22nd Jun 2010
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As widely anticipated, the chancellor announced that Value Added Tax (VAT) would go up to 20%, but implementation will be delayed until 4 January 2011.

Predictions that he might also increase the reduced rate missed the mark, so it will remain at 5% for the existing goods and services that qualify. There is no change either to the scope of zero-rating, and no changes to the registration and deregistration thresholds set by Alistair Darling in March.

New sectoral rates for the VAT Flat Rate Scheme (FRS) are available in Budget Note 45 on the HMRC's website. Some of the thresholds applicable to the scheme will also be increased from January in line with the higher standard rate.

The delay in implementation until after the 2011 January sales was not entirely unexpected following lobbying from major retailers after the temporary 15% rate cut, which they complained was introduced with far too little notice for them. For small businesses there is at least some time to plan for the VAT increase, and some - albeit limited - scope to look at costs and pricing where supplies are made to consumers to try to limit the damage in January.

Anti-forestalling legislation will attempt to thwart traders who try to come up with schemes or arrangements to avoid the increase, along the same lines as the provisions which applied when the standard rate went back to 17.5% from 15%, so the mechanics of these will be familiar to VAT advisers.

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As expected, the chancellor also confirmed that Royal Mail will have to charge VAT on some of its services from 30 January 2011. So-called "social mail" will remain exempt, but services which are not covered by Royal Mail's duty as 'universal service provider' will be VATable, specifically Parcelforce and the Postbus rural passenger bus service. These will therefore fall under the same VAT rates as similar services supplied by other commercial operators and create a more level playing field.

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Reactions

Giles Mooney, managing director, PTP Limited
“The VAT rise will receive most attention in the media but the NIC rises for employees, employers and the self employed will come as a blow to small, medium and large businesses alike. The Conservatives promised they would stop Labour’s planned NIC rises and the Liberal Democrats promised no VAT rises, both stating that it would have a detrimental effect on business. Six weeks later it seems we’re in a very different place.”

Professor Mike Devereux, Oxford University Centre for Business Taxation
"The rise in VAT helps to provide a credible return to fiscal stability over the lifetime of this parliament, but it can also create an immediate fiscal stimulus, as consumers bring forward spending to avoid the higher rate being introduced in January 2011. An additional advantage of closing the deficit through VAT is that – unlike the case of income tax and corporation tax – this should not induce individuals or corporations to move abroad. This is because the tax is primarily determined by the location of the consumer. The existing VAT rate at 17.5% is the third lowest rate in EU 27. The new rate of 20% is exactly equal to the EU average".

Lisa Macpherson, National Director of Tax at PKF
“While many businesses will have difficult decisions to make about passing on the VAT increase to customers, at least delaying the increase until January gives them more time to prepare for the change. In addition, the sensible start date of 4 January will avoid the issues businesses experienced with the previous change which took effect from midnight on New Year’s Eve in most circumstances. The wider effect on inflation should also be reduced as the impact of the January 2010 return to 17.5% will drop out of the figures by then so, hopefully, the new increase should not have a large knock on effect on interest rates.”

John Voyez, VAT director, Smith & Williamson
"The VAT increase was an obvious choice as it brings in big money straight away at no extra cost to the government. The additional income goes straight to “the bottom line”, but it will hit economic indices. The new 20% rate will apply from 4 January 2011. By the end of the parliament, this is likely to bring in an extra £13bn a year.
 
It is likely to result in a spike in Christmas sales activity and a general boom in spending from late Autumn on when the implications start to hit home. At the moment, 4 January is too far away to worry about, and summer holidays are more important.

The VAT rise might also result in a resurgence of more aggressive VAT planning activity which has been much more low-key in recent years as HMRC have got to grip with targeted anti avoidance legislation. Previous increases in the SDLT rate from ½% to 4% saw much more planning take place as a result of the increase.
 
Certainly some businesses will be affected more severely than others, such as the financial services, charities, housing associations, and the health and welfare sectors as these sectors typically have very low VAT recovery rates."

Robin Williams, technical director, Low Incomes Tax Reform Group (LITRG)
"While the increase in the rate of VAT to 20% announced in today’s Budget is unsurprising, the Low Incomes Tax Reform Group (LITRG) are concerned about the position of disabled people who, because of their disability, have to invest in goods and services that are subject to standard-rated VAT. The increase in the VAT standard rate, without a balancing extension of reliefs or reduced rates, will make life yet more difficult for people with disabilities".

Charlie Mullins, founder, Pimlico Plumbers
"VAT is a 'no brainer' of a rise – it had to happen. I'm like everyone else, if I had to decide between keeping more of my company’s income or handing it over, the choice would be simple.

"It's just not the case this time around. Although it'll hit my firm, it's a case of staying in business or going out of business and that’s why I’m behind a rise. To be honest I thought it’d go up straight away."

 

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