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Preparing for VAT rate changes

Adam Cutler, Director, VAT
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Read more about the VAT rate cuts announced by the Chancellor in our latest insight here.

There is increasing speculation that the Chancellor will shortly announce changes to some of the UK VAT rates. Organisations need to consider the impact of this on sales, purchases, systems and pricing.

The potential changes that are being most frequently reported are:

  • a reduction in the standard rate of VAT across the board
  • applying a lower VAT rate to the hospitality and tourism sector
  • reducing the VAT rate that applies to certain activities that require particular stimulus.

Any general reduction in the standard rate is likely to be for a very limited period, in order to encourage consumers into discretionary spending in the knowledge that prices will soon rise. Germany is cutting its VAT rates for just six months. When the UK reduced the standard rate of VAT from 17.5% to 15% in December 2008, this lasted for 13 months. It then rose to 20% twelve months later.

What should organisations consider if there is a temporary reduction in VAT rates?

  • Are your systems set-up to cope with more than one standard rate of VAT during the transition period?
  • If you cannot recover all of the VAT you incur, can you get your suppliers to invoice after the rate change? Before rates then go back up, would you be prepared for them to invoice in advance?
  • If you quote prices inclusive of VAT, how will this affect your pricing and margins?
  • If your customers cannot recover VAT, will they be looking to defer purchases they were due to make from you, or at least ask you to hold off invoicing for these? How will this affect cashflow?
  • Are you getting the “tax point” right on your sales, so that the correct rate of VAT is applied?

To discuss how changes in VAT rates could impact your organisation, please speak to Robert Warne, Robert Marchant or your usual VAT team contact.

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Adam Cutler
Adam Cutler
Director, VAT and Customs Duty Services