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VAT/IPT changes

The standard rate of VAT is set to rise to 20% with effect from 4 January 2011.

The effects of this change will be widely felt, but particularly so in the financial services sector where businesses are generally unable to fully recover the VAT they incur – thereby representing a genuine increase in costs.

Businesses will also need to make the necessary changes to their software and accounting systems to account for the rate change, although the date of the change means that - unlike the previous rate change – these changes do not have to be implemented immediately and can be properly planned for.

The six month lead-in time to the rate change also means that partially exempt businesses have a “window of opportunity” in which to explore areas where the increase in costs can be managed or mitigated to some extent. Useful mechanisms in this area could include bringing forward planned expenditure or making pre-payments. However, by way of caution, it should be noted that HMRC have again introduced anti-forestalling measures to counter any perceived “artificial arrangements”.

The impending change in the standard rate also represents an ideal opportunity to revisit and review existing VAT recovery arrangements and methods more generally, with a view to minimising any tax leakage.

VAT and IPT changes

The IPT rate is also set to increase on 4 January. For taxable insurance contracts entered into after that date, the standard rate will rise from 5% to 6% and the higher rate from 17.5% to 20%.

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