Buy now to beat New Year VAT rate rise? Not necessarily…

Friday, August 20, 2010 | Posted by: Gary Woods
Categories: Business advice, Tax | Tags: business, tax, VAT, Gary Woods, tax year, suppliers, expenditure, reclaiming, rise, increase, admin, timing

“In the bleak midwinter, the VAT rate increase made moan…” Not quite the first line of the Rossetti poem, but the planned 2.5% increase in VAT from the beginning of next year will still bring a chill to both consumers and businesses. So what can be done to make New Year a little happier for both?

Planning significant expenditure?
If you’re planning to shell out, for example on property improvements or a new car, then consider spending your money before 4 January in order to beat the increase – or face having to stump up the extra cash.

Businesses may face the same dilemma. The increase will be particularly unwelcome for those that can’t recover all of the VAT that they pay out. Even those that can claim their VAT costs will have to consider the cash flow implications of the hike. For example, the extra tax may have to be paid to suppliers before it can be reclaimed from HM Revenue & Customs (HMRC).

Does it just come down to timing?
For the most part, yes – as most businesses are able to recover all of the eligible VAT that they incur. You will need to compare the benefit of spending early, with the consequences of waiting until after the rate increase. For some, advance purchases may not be the answer.

Rather than bringing the purchases forward, companies should consider discussing invoice and payment dates with suppliers.

If the receipt of the VAT invoices could be timed with the end of their VAT accounting period, they may be able to reclaim the input VAT in full from HMRC closer to, or even before, the time that they have to pay the suppliers.

Businesses that are unable to recover all of the input VAT that they incur will be more restricted. Bringing forward the date of purchase may be the only option to avoid the rate increase.

A word of warning…
If your business makes supplies on or around the time of the rate change, take heed. Special VAT rules can apply to such transactions where it is perceived that there is tax avoidance and VAT that ought to be payable is not being declared. These rules only apply in specific circumstances and not normally where the purchaser of the goods or services can recover the VAT to be charged in full.

The VAT rate increase will help to balance the country’s books; estimates suggest that it will raise about £13 billion per annum.

However, that will be of little comfort to UK businesses and consumers. The VAT rate increase will have huge implications for them, and there is bound to be uncertainty.

Businesses will have concerns about the administrative and commercial costs of having to adapt to another VAT rate change. Consumers will be worried about the effects that the increase will have on household budgets.

What is certain though is that as the snow falls, snow on snow, in the bleak midwinter, the Treasury coffers should grow and grow.

Image adapted from: © Sally Mahoney/Flickr, 2006

Gary Woods is Senior VAT Manager at Grant Thornton – and the latest member of the Grant Thornton blogging team. He’ll be blogging about VAT and other related issues.

You might also like:
* Previous Protect Your Wealth posts covering VAT issues.
* How to minimise tax in a property downturn
* Act now to beat CGT rises