As we gradually digest the deep cuts announced in the Coalition Governments Spending Review what is becoming clear is that they are reliant on the private sector to increase tax revenues. For the cuts to succeed and reduce the deficit, the private sector is going to have to work very hard to create jobs. The current rate of job creation will have to improve significantly in order to take up the slack of public sector redundancies. The fewer people in work, the more difficult it is to maintain the tax revenues that are critical to the whole exercise of balancing the books and keeping inflation and interest rates low.
What do you think? Will these cuts work? What does it mean for your business? Let us know!
Well there are certainly some challenges for the public sector within the Spending Review. With asset sales, further outsourcing and partnering arrangements, the shape of Govt Departments and Local authorities alike will change considerably over the next 4-5 years. It appears that these bodies will focus more on commissioning services rather than delivery, which will be undertaken by the private and charity/ voluntary sectors.
From our perspective many of these initiatives will bring VAT complexities and VAT management issues which will need to be addressed to make sure the arrangements don’t cost 20% more than they did previously!
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There are changing times ahead in the Public Sector, so I have taken the opportunity to sit down with Steve McIntyre our Public Sector Director to get his thoughts. Here’s what he had to say:
Many of the public spending decisions and initiatives being announced by the Coalition Government are bound to have VAT implications. History shows us that VAT can have a major impact on Government plans, and strategies to deal with this had to be put in place.
For example; a concession was introduced to deal with problems on the zero-rating of wave 1 Acadamies, then further waves have been built using Local Authority peppercorn arrangements. Children’s Centres also posed VAT recovery problems when the budget for them was first passed to Local Authorities.
I think that the following initiatives are likely to cause VAT headaches in the coming months;
State funded independent schools – like academies, these are likely to be charities or trusts and therefore will come within the restrictive charity VAT rules – zero-rating of capital projects only available to a new build or annexe. VAT registration may also be required if business activities are undertaken.
Cancellation of BSF – The Governments capital plans to replace BSF have yet to be announced, but there are indications that existing empty commercial/retail premises may be used to create “education space”. Again, there could be VAT problems for the new independent schools and trust schools.
Further Out-Sourcing – I think that there could be a new phase of out-sourcing projects as severe cuts to Local Authority budgets materialise over the coming years. VAT savings can be made on certain services, such as Sport and Leisure moving into a trust, but other areas may incur additional VAT costs which need to be taken into account. Also, there can be some complex land and property transactions involved where VAT, again, becomes an issue.
As always with VAT I would always recommend the earlier these issues are discussed and addressed the better – VAT is a transaction tax and therefore it can often be too late to remedy things once a supply takes place.