Budget June 2010 commentaries - VAT & other indirect taxes

"The commentaries below are written in general terms. Details can also be found in our downloadable Budget Report brochure. You are strongly recommended to seek specific advice before taking any action based on the information given, both in the commentaries and in the publication."

Initial thoughts from John Voyez, VAT Director

"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 £13 billion 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."

VAT rate change

The Chancellor announced that the standard rate of VAT will increase from 17.5% to 20% on 4 January 2011.  

There are also some complicated anti-forestalling rules to stop businesses taking prolonged advantage of the 17.5% rate after 4 January 2011.  These rules add a supplementary charge of 2.5% VAT in certain circumstances.

The Chancellor also confirmed that the exemption and zero rating provisions would not be altered.  Therefore sales of children’s clothing, certain food items, newspapers and books will remain zero rated for VAT while education and health services (that are currently exempt) will remain free of VAT. 

It should also be noted that the payments on account scheme thresholds will be made at a later date to reflect the VAT rate change. 

Comment        

The increase in the standard rate of VAT is expected to deliver around £12bn into the Treasury.  Whether this is accurate or not and how this could have been measured is unclear.  Given that the UK previously had one of the lowest standard VAT rates in Western Europe, and that there should be no additional cost for the Government in order to collect this additional tax revenue, this was always likely to be the Chancellor’s number one choice for raising additional revenue.

The change in the VAT rate is again likely to cause many businesses more administrative issues after recently changing from the temporary rate of 15% to 17.5% last year.  There are special rules dealing with tax points for supplies that cross the VAT rate change: these should be reviewed by all businesses to ensure the correct rate of VAT is applied to purchases and sales. 

We expect there will be transitional rules for businesses trading across the deadline to charge the lower 17.5 per cent rate, which we expect will be announced closer to the time.