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VAT

The increase in the VAT rate from17.5% to 20% in the emergency budget did not come as much of a surprise. What impact do you think it will have on businesses?

George Osborne believes that the VAT rate increase will generate £13 billion by 2014 and it is clear that we shall all be contributing to that total! However, the increase is not due to be implemented until 4 January 2011 so I suspect that retailers will enjoy a bumper Christmas and sale period although things will become more difficult after this as it is estimated that families will be left more than £500 a year worse off by the increase.

The increase will also affect the cost of actually running a businesses as everything will become more expensive including unavoidable expenditure such as petrol, diesel, fuel and power. Whilst many businesses will be able to recover the VAT, the increase could result in cash flow difficulties.

Can businesses do anything to defer the impact of the VAT rate change?

Businesses which are planning significant expenditure on items would be advised to acquire

them before the 4 January deadline. Anti forestalling rules have been introduced but

it is still possible for businesses to invoice up to six months in advance for supplies with a value of less than £100,000. This means that a business can ask for an invoice to be raised before 4 January at 17.5% VAT for a transaction which won’t take place until June.
Equally, businesses supplying goods and services to the public may also want to raise an invoice before 4 January at 17.5% for a supply that won’t take place until later. Clearly there are other issues which need to be considered including cash flow.

What other changes to indirect tax were introduced in the budget?

The standard rate of insurance premium tax, which applies to policies covering the home, buildings, contents, travel and cars, was increased from 5% to 6%. As a result, the IPT charged on a typical car insurance policy of £580 would rise from £29 to £35.

Higher rate IPT, which applies to policies sold as an add-on to other products, such as holidays or those covering white goods like a fridge-freezer, will go up

from 17.5per cent to 20per cent.

Again this change will be introduced from 4 January 2011 so customers would be well advised to spend before this date.

Anything else we should be aware of?

In addition to the tax increases outlined above, the Government also announced changes to the penalty regime for the late filing and late payment of VAT returns. The changes mean that businesses will be charged for the late submission of returns and the late payment of returns. The date for implementation has not yet been announced.

As always, my advice remains, that if a business sees that it is going to have difficulty in submitting or paying a VAT return, it should contact HMRC at the earliest possible time as this will help to mitigate penalties and should prevent unwelcome and stressful intervention by HMRC.

I would also point out that HMRC’s new penalty regime is very aggressive and we are seeing the imposition of more and higher penalties than ever before. It goes without saying that businesses need to treat their VAT reporting requirements seriously

as errors can be very expensive.

Geraint Lewis

National Head of VAT

geraint.lewis@mazars.co.uk

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