Pre-Budget Report 2008: how the new VAT rate will work
26 November 2008
After just over seventeen and a half years, the standard rate is 15 per cent again, albeit only for 13 months, from 1 December 2008 until 31 December 2009.
The Chancellor announced this reduction in his pre-Budget Report with the intention of breathing fresh life into the consumer market.
The new VAT fraction for VAT-inclusive standard-rated supplies is 15/115 or 3/23, instead of 17.5/117.5 or 7/47. This will mainly apply to retailers, who must apply the new fraction to all standard rated takings received from 1 December 2008, unless a payment relates to goods taken away or delivered before 1 December, in which case the old fraction still applies.
Businesses that issue invoices for goods or services should apply the new rate to invoices issued from 1 December, unless the basic tax point was before 18 November or payment was received before 1 December, in which case the old rate still applies.
However, where goods or services to be supplied from 1 December are invoiced or paid for before that date, the taxpayer can choose to apply the 15 per cent rate. A credit note should be issued where the original invoice was at 17.5 per cent VAT.
The one week’s notice given for this change means there is little likelihood of tax avoidance at the beginning of the 13-month period, and HMRC have indicated they will apply a light touch to errors. But as supplies could be artificially brought forward to before the start of 2010, anti-avoidance provisions will be introduced for the end of the period.
The reduction is clearly welcome, although it remains to be seen who will benefit most. At least partly exempt businesses and those with non-business activity, such as charities, should enjoy a consistent 2.5 per cent reduction in their irrecoverable VAT for this time.
The problem for retailers lies in the mechanics of introducing the change.
Stephen Robertson, the director general of the British Retail Consortium, has expressed worries over the ability of smaller retailers especially to manage the switch in time for the new date.
Mr Robertson said: “Shops will cope, but implementing a new VAT rate in just a week will be exceptionally difficult for customers and retailers at their busiest time of year. IT system changes, replacing shelf labels and stickering-over prices on packs will be a mammoth and costly task. Staff will inevitably be diverted away from serving customers. Small retailers will find all this particularly difficult to accommodate.”
The Federation of Small Businesses said that the cut would be “difficult and costly for small and medium-sized businesses to implement by next Monday”.
The motor industry has welcomed the cut in VAT, predicting that showroom prices should start to fall next week.
Sue Robinson, director of the Retail Motor Industry Federation, said: “The reduction in VAT means that car prices will fall, and could encourage consumers to return to showrooms. This will help to restore consumer confidence, which is key to the revival of the overall economy.”
While the standard rate of VAT is to fall temporarily, it has been revealed that the government had been planning not simply to restore the old 17.5 per cent rate on 31 December 2009 but considered an increase for 2011.
A Treasury note accompanying an order to Parliament and published on its website indicated measures to raise VAT to 18.5 per cent in 2011/12.
These were dropped by the government in favour of future rises in NICs and the top rate of income tax as a way of offsetting massive increases in public borrowing.
The publication of the note was blamed on an administrative error by Treasury Minister, Angela Eagle.
A Treasury spokesman added: "Someone appears to have emailed documents to a website that should not have been sent. There is no plan to increase VAT. The chancellor said in the PBR that he wanted to raise revenue in the fairest way possible and by targeting those that have done best in recent years."
