Concern over future VAT

Businesses hoping for an extension of the 15% VAT rate beyond this year were
disappointed by last week’s Budget announcement.

But they should count themselves lucky that VAT remained static, according to
tax experts, who warn that a future hike is a real possibility.

According to Lorraine Parkin, partner of tax services – VAT at Grant
Thornton, at a time when businesses are struggling to deal with already dire
market conditions, further rate changes could deter sales and increase
administrative costs.

Parkin said Darling’s introduction of legislation to enable a temporary VAT
change for 12 months or less could ‘lead to a significant increase in the VAT
rate after the next election.’

The 2.5% cut in VAT, which expires on 31 December this year, highlighted the
administrative burden on business, and with chronic cash flow issues unlikely to
recede, further changes will undoubtedly prove an expensive – and possible
damaging – exercise.

The ability to tamper with the standard rate of VAT within such short periods
will also allow greater scope in coming years to claw back the current reduction
in tax receipts.

Based on current tax receipts, government figures show the Treasury expects
to receive around £64bn in fiscal year 2009/10. Assuming revenues remain static
in 2010/11, a six month hike in the VAT rate to 20% would net the Treasury an
estimated £5bn.

The legislative amendment has also fuelled conjecture that the chancellor
plans to temporarily increase the rate to 20% – nearer to the rate in many
European countries.

Andrew Jupp, head of tax at Tenon, said the chancellor missed an opportunity
to raise VAT to 20%, which would have added £12.5bn to government coffers. ‘The
UK boasts one of the lowest rates of VAT in Europe so raising the rate to 20%
would bring it in line with France, Austria, Hungary and Italy,’ he said.

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