Pre-Budget Report: VAT

The Chancellor confirmed that the standard rate of VAT is returning to 17.5% on 1 January 2010 as planned, following a 13-month reduction to 15% which has cost the economy £11.5bn.

Comment: This was not a surprise, but retailers breathed a sigh of relief that the rate of VAT would return to 17.5% and not to a higher rate, such as the 20% some had predicted. The Chancellor said that inflation early next year will increase from 1.5% to 3% partly due to this VAT increase. This is because most items in the CPI basket, apart from food, attract VAT. However some retailers also fear that the return to the old rate could cause a rush to spend before the year end, creating a slump in the new year.

The Treasury had already announced that there would be a period of grace for those trading across the midnight deadline, such as clubs and bars, allowing them to change to 15% when they close or at 6.00 a.m. (whichever is the earlier), which is helpful. Also the additional amount of VAT may be added automatically by the tills rather than on the prices on the goods on the shelf for a period of 28 days. There are also anti-avoidance provisions to prevent loss of revenue by artificially benefitting from the old rate for various transactions including large ones and those with connected parties.

Small businesses operating the flat-rate scheme should not forget to check their flat rate from 1st January 2010, as the rates have all been adjusted, and all businesses should ensure that transactions straddling the rate change are dealt with correctly.