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How will the changes in VAT affect business?


In November 2008, the Cabinet estimated that the cost of the change for businesses in the rate’s fall to 15 percent and return to 17.5 percent would be £300m over two years. The main cost issues faced created by re-pricing, bookkeeping costs and staff checks. The biggest cost area was estimated as coming from extra accounting costs. 

The Cabinet papers also estimated that the VAT rate change to 15 percent would add one percent to the UK Gross Domestic Product and that it would inject £3.8 billion into the economy by April 2009 and up to £8.6 billion by the end of the 2009/10 financial year.

There are around two million VAT registered businesses in the UK and approximately 2.7 million businesses that are not registered. However, even businesses that are not VAT registered are affected by the rate changes, as they cannot recover any of the VAT charged to them. Similarly, even if a business is VAT registered, but it makes VAT exempt supplies, for example education, finance, gaming and healthcare, then it cannot recover the VAT it incurs on its costs if it relates to the making of that exempt supply. Businesses that are VAT registered but make a mixture of taxable and exempt supplies are called ‘partially exempt businesses’ and it is estimated that there are about 140,000 businesses of this type in the UK.

So, when the VAT returns to 17.5 percent on the stroke of midnight on New Year’s Eve, it will hit these sectors hard in the cost base of items they buy in. Charities will also be heavily affected when the VAT rate rises, as many tend not to be VAT registered, or simply cannot recover the VAT they incur. Many charities assume that they do not have to pay VAT on the items and services they buy, for example construction costs, equipment etc, however, this it not the case as the reliefs from VAT for charities are limited. On numerous occasions, charities have failed to recognize this fact when budgeting for fundraising projects.
 Larger manufacturing businesses will have to put in place checks to make sure that they charge VAT correctly depending on when they ship and supply goods. Larger businesses running computerized systems such as SAP will have to amend VAT codes set for 15 percent. The handling of credit notes for supplies made around the VAT change would also have to be closely monitored.

Special accounting arrangements are being made for businesses such as retailers and pubs operating beyond midnight on the 31st December 2009. The HMRC recognises that making the necessary changes to account for VAT at 17.5 percent may cause particular problems for such businesses at what can be a particularly busy time of year. For example, it would not be practical for a hotel or bar hosting a New Year’s Eve party to adjust their tills to account for VAT at 17.5 percent and to alter their prices accordingly. For such businesses, the HMRC will allow them to account for VAT at 15 percent until the end of trading on the 31st December, or until 6am on the 1st January 2010. However, this rule does not apply to mail order or online retailers, coin operated machines and businesses that account for VAT on the basis of VAT invoices or pre-payments for supplies of goods to be provided after 6am on the 1st January 2010. 

Interestingly some larger retailers are using the rate change as a PR tool. John Lewis has stated that it will not change its prices until after the sales and will absorb the VAT increase, whereas M&S has said that it will pass the rate rise on straight away. HMRC have also said that they will operate a "light touch" regarding errors made on VAT returns submitted by businesses covering the period of the rate change.

Comment from the CBI suggests that retail sales have grown and they are hoping for an even better December. High sales activities are predicted in grocery, leather, footwear, furniture, carpets and durable household goods and analysts say sales of more expensive items will rise prior to the VAT hike on items such as fridges and TV's.

VAT is a major contributor to government funds and there has been talk of it increasing it beyond 17.5 percent in the UK. In a pre-election year many would say it highly unlikely that it would rise, but the UK is at the lower end of the VAT rate table in Europe and so it remains a possibility.

For further VAT advice, please contact Liz Maher at Centurion VAT Consultants on 01633 415390 or visit

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