We’ve now had the chance to review the VAT changes announced in the Budget and most importantly to consider the commercial impact of these. The proposed changes that are highlighted in the Consultation Document ‘VAT: Addressing Borderline Anomalies’ , all purport to remove anomalies and level the playing field by removing zero rating or exemption for a number of areas including the sale of hot take away food, approved alterations to listed buildings, sports drinks, self storage and a number of other areas. This follows a trend seen elsewhere in the EU where the tax authorities/governments appear to be tinkering around the edges with zero rates and exemptions having already raised the standard rate of VAT in many cases.
It is clear from press coverage over the past few days and also from discussing these changes with businesses in the industries affected that the changes were largely unexpected and took businesses by surprise – not helpful in the current climate. Perhaps more surprising is the fact that the Impact Assessments almost entirely fail to consider the impact of the changes on the wider supply chain. Many manufacturers operating in the industries affected by the changes will have profit margins seriously eroded or wiped out entirely as a result of a rate change from 0% to 20% when the product is sold in a retail environment. This could impact on jobs. The Impact Assessments focus on the impact on the consumer, failing to recognise that businesses cannot always simply raise their prices by the relevant VAT amount – the market may not bear this price and the consumer could switch to an alternative product, regardless of whether this is also standard rated.
The rationale for the changes is stated as being focused on simplifying matters, but to pick on the easiest target in the proposed changes, it is difficult to see how a business is going to be able to monitor the temperature of a pie when sold to a customer – standard rated if just out of the oven and zero rated half an hour later for a different customer once it has cooled down. Many more questions arise in relation to the specific measures, and hopefully comprehensive comments illustrating the commercial difficulties will be provided to HMRC as part of the Consultation. The changes will achieve the goal of raising additional revenues but it remains to be seen as to what the hidden cost to niche industries will be.
To discuss this further please contact Julie Park on 01962 735350.