A temporary cut in the rate of VAT – would it be enough to stimulate the economy?
We see in the news today that Shadow Chancellor, Ed Balls is urging the government to temporarily reduce the rate of VAT to stimulate the economy. Good news dare I say it for VAT advisors, but would it be good news for the economy? Karen Mulcahy looks at all the angles.
If we think back to the last reduction in the standard rate from 17.5% to 15%, this is credited with maintaining a higher than expected level of consumer spending during the economic crisis. However, when the rate reverted to 17.5% at the beginning of 2010, spending stagnated. With a further increase to 20% on 4 January 2011 consumer spending in the period immediately prior to the increase escalated, but spiralled as soon as the new rate took effect.
But what will a further temporary reduction in VAT achieve?
For consumers, a lower rate of VAT would give them a great opportunity to reduce the impact on the domestic purse at a time when spending power is being stretched. As VAT is a tax on spending not income, consumers would feel encouraged by a reduction of VAT.
For businesses, however, it would be a further complexity to an already complex regime in which they have already had to suffer the administrative cost and inconvenience of variations to the standard rate over the past few years.
Costs include software revisions, employment related expenditure and general overheads all of which need to be wrapped up into the price charged by the business to its customers. This means that, at the end of the day, the consumer is still paying the price – it’s just called something else!
Of course, from a tax perspective, The Exchequer still needs to balance its books and any decrease in the take from one tax must be countered by an increase in receipts from another tax. However, the theory is that a decrease in VAT will lead to a higher VAT yield as consumers will have more confidence and consequently spend more – albeit that it is the consumer currently suffering with less cash to spend! As mentioned above, the software businesses hired to assist with the rate change software will have extra work and probably enhance their own profits – leading to more additional tax. In addition, the businesses affected by the change, and having to employ more staff (or extend employment hours) will end up paying more in PAYE and NIC.
We will have to wait and see whether the call is answered.
A positive side-effect to the VAT rate rise for retailers
We had a question from a client which raised an interesting point this week, one that was actually obvisous but not one we have come across before. It concerns the levels of commission stores operating the retail exports scheme will receive after the change of vat rate.
We are all aware that retailers will need to review prices post 4 January 2011 to reflect that a higher proportion of the ticket price will need to be paid over in VAT. However, there can be benefits. For example, some retailers operate a Retail Export Scheme. This is where the VAT is refunded to a traveller when they leave the country with goods purchased in the UK. Normally the customer is not refunded all of the VAT; the refund is less an administration fee. The fact that the administration charge is usually based on a percentage of the VAT refunded means that a rise in VAT charged will lead to more commission.
One other point; the commission itself is zero rated, which means that the VAT increase will not affect it at all!
It’s not just VAT that’s going up in the New Year
Not a day goes by without the change in the standard vat rate to 20% being mentioned in the news, yet it’s not only the rate of vat that’s set to rise in the New Year.
Air Passenger Duty has gone up to 55% but no-one has yet mentioned the rise in Insurance Premium Tax (IPT). IPT always follows the rate of VAT, so the standard rate is going from 5% to 6% and the higher rate from 17.5% to 20%.
Not good news for an already struggling travel industry as this means that the cost of travel insurance, which carries the higher rate of 20%, is set to increase by around 2.5%. Taking into consideration the rise in Air Passenger Duty and the increase in IPT, we think as a result, the cost of the average European holiday will rise by some 10%.
The higher rate of IPT also applies to electrical and domestic appliances and insurance sold with cars, while with the lower rate of IPT includes medical insurance, extended warranties and roadside assistance.
Perhaps taking a “staycation” isn’t a bad idea after all!
Been Challenged by HMRC? Always get it in writing!
We have recently been involved with a successful complaint to the Revenue Adjudicator on behalf of a client. The case is unusual but involved a claim by us that the client had been misdirected by HMRC in the past to their detriment. The taxpayer had received a VAT visit in 2008 after which a substantial assessment over £270K was raised as this officer disagreed with the VAT treatment of certain supplies to non UK customers.
However this treatment had been questioned and accepted in a previous visit that took place in 2003. A further visit took place in 2005 in which similar transactions were reviewed but not questioned.
When questioned by the Adjudicator, HMRC relied on the fact that they had issued a VAT notice to the taxpayer in 2005 and thus they maintained the assessment was valid. However the Adjudicator ruled that as the officer could not provide any further information and failed to provide an accompanying letter with the VAT notice drawing the taxpayer’s attention to the correct treatment, they had failed to provide sufficient advice
The Adjudicator upheld our complaint and directed that HMRC must withdraw the assessment and reimburse costs incurred.
We would always recommend in these situations that you always get written confirmation from HMRC.
If you need any further information, then do contact us
Anti-forestalling legislation and the countdown to the VAT rate rise
As always with changes, this anti-forestalling legislation prevents businesses taking advantage of the increase in VAT where the services or goods are supplied to a customer who cannot recover all the VAT on the supply such as a VAT exempt charity or private individual. The anti-forestalling regulations, for example, will cover situations where the customer and supplier are connected parties or the value of the supply exceeds £100,000. In these cases, a supplementary charge will be implemented which amounts to an additional 2½%.
This enquiry came through on our “Got A Question” feature on our website:
“Just read your anti-forestalling legislation note and have a quick question – we have just placed an order for a new motorhome (£45k) for delivery next April, the full price has been calculated and agreed using 17.5% VAT. We have been advised by the supplier that as long as they raise an invoice AND WE PAY THE VAT IN FULL before 4th Jan 2011 deadline that we will not have to pay the new 20% VAT rate.
Do we have to pay the VAT or is not the issuing of an VAT invoice that is all that is needed as long as we pay the full invoice within 6 months”
The answer to this is that technically this is correct. If the invoice is raised now, as long as payment is due under the terms of the purchase agreement within 6 months, then VAT at 17.5% can be charged.
However, if the company raises a VAT invoice to the purchaser now for the purchaser to benefit from the lower VAT rate, then company would have to pay that VAT over to HMRC now, unless they operate on the cash accounting scheme.
We are receiving many similar queries on our hotline service and we will be happy to advise on the correct treatment of VAT at this complex time. Just fill in the “Got A Question” form, and we’ve got the answer!
A supply made after 4th Jan 2011 will carry VAT @ 20%. Or will it?
It has been well publicised that the standard rate of VAT will increase to 20% on 4 January 2011. This means that all supplies made on or after this date will be subject to the 20% rate of VAT. Or will it?
It is still possible to secure the 17.5% rate of VAT for supplies made on or after 4 January 2011, as long as the provisions of the anti-forestalling legislation are not breached.
HMRC consider that anti-forestalling occurs when arrangements are put in place for a VAT invoice to be issued by a supplier or payment received by a supplier before the rate increase where goods are not due to be delivered or services to be delivered until after the rate increase.
However, the current rate of 17.5% can still apply where an advance payment is made or an invoice is issued in advance of 4 January 2011 (to be paid within a maximum period of 6 months), given the following circumstances: -
· the supply must be valued at £100,000 or less
· the supplier and customer must not be connected parties, and
· the supplier (or someone connected with the supplier) must not provide any finance.
The anti-forestalling legislation does not apply where the supply is being made to a business which is able to fully recover the VAT charged through its own VAT return.
There is scope to mitigate the impact of the rate increase – but businesses need to tread carefully to ensure that they do not fall foul of the anti-forestalling provisions.
If you are in any doubt, do contact us here at The VAT Consultancy and ask to speak to a consultant.
Were you suprised at today’s VAT rate increase?
When we looked into our crystal ball a couple of months ago we predicted that the rate of VAT would rise to 20%. What we didn’t expect was that it wouldn’t come into effect for another 6 months. So, today’s news from the Chancellor that the rate of VAT will not go up until 4 January 2011 has come as quite a surprise to us all.
The majority of people who took part in our Budget Survey agreed that the rate would be rising to 20% within 3 months of the announcement, only 6% thought it would be the New Year. And, with this increase in VAT set to raise £13 billion in revenue, we all believe this will go someway to reducing the national deficit.
So, there we have it, we now know that the rate won’t be increasing for some 6 months, some temporary relief for the consumer, however, we must remain mindful that an increase is just around the corner and there is still the potential for further rises to the rate of VAT.
In response to today’s news, John Crawford, our Managing Director comments: “Such a rise will mitigate the bitter medicine of spending cuts and deferring the rise until next year in the hope of stimulating consumer demand will give time for businesses to prepare – important since many are still fighting for their lives.
Whether registered for VAT or not, businesses will pay more for their goods and materials. Either they subsume those costs and reduce their margins, or they raise their prices.
As ever, consumers will pick up the tab in any increase passed on in the supply chain when they buy the affected goods and services.
If you are going to have to spend 2.5% more on your big ticket VAT items, it makes sense to buy them before the end of the year.”
Look out later for full details of the changes to VAT in our budget newsletter.
John’s in demand as VAT rate rise is announced!
With the announcement today that the rate of VAT will be rising to 20% on 4th January 2011, our Managing Director is having a busy day today responding to the news with our local TV and radio stations.
You can listen to him on:
3.30pm BBC Radio Gloucester on FM – 104.7, 95.8, 95, AM – 1413
http://www.bbc.co.uk/iplayer/playlive/bbc_radio_gloucestershire/
5.00pm BBC Radio Solent on FM 96.1 & 103.8
http://www.bbc.co.uk/iplayer/playlive/bbc_radio_solent/
5.45pm BBC Radio Bristol on 94.9, 103.6, 104.6, AM – 1548
http://www.bbc.co.uk/iplayer/playlive/bbc_radio_bristol/
6.30pm Points West, BBC One (West only)
If you live outside of the West area, then you can view this on Sky Channel 986
The importance of charging VAT correctly!
A case has come to our attention this week regarding a refused DIY Housebuilder’s claim.
The taxpayer paid VAT to a builder on a new build dwelling thinking they could reclaim the VAT from HMRC. HMRC refused as the VAT was incorrectly charged (zero rate applicable to new build), the taxpayer needed to get credit from their builders’ yet two of his suppliers had refused to refund.
The Tribunal agreed with HMRC that it was not up to HMRC to refund VAT incorrectly charged. This confirms again that VAT incorrectly charged CANNOT be reclaimed from HMRC.
You have been warned….