VAT’s gone up. What's your plan?
On 4 January 2011, the UK VAT rate rose to 20%
Download our webcast on the VAT rate rise. The passcode is 980020.
See our Q&A section dealing with the implementation date of 4th January and how to invoice for supplies up to, on and after that date.
This VAT rate change is the third over a period of 26 months, and many organisations may feel that they are well-versed in preparing for and executing VAT rate changes.
However this VAT rate change has additional consequences. Unlike the temporary cut in VAT, this VAT rise will be a permanent part of the fiscal landscape. Businesses and consumers will need to plan accordingly. It’s expected that Exchequer receipts will rise by over 2% due to the increase, which is projected to raise £65 billion over the next five years.
This potentially permanent increase raises some fundamental questions for organisations. Consumer businesses will need to decide who will bear the additional 2.5% cost of VAT - the consumer, themselves, or a combination of the two? At the other end of the spectrum, businesses that cannot reclaim all of the VAT they pay - charities, educators, banking and finance being amongst them - will need a plan to deal with their rising VAT costs.
Review for the rate rise
We recommend that organisations take advantage of the VAT rate rise to review their management of VAT. A review will:
- Provide assurance around being in good shape for the rate rise;
- Create a clear strategy for dealing with increased VAT costs;
- Identify potential solutions for mitigating the effect of the increase.
Are you in good shape for the rate rise?
Organisations will now have dealt with the immediate systems and process changes that the rise to 20% VAT entailed. However, there are other areas to consider – these include:
- Is your team trained in dealing with the VAT rate rise? For example, do they know the rules around tax points and invoicing?
- How is the rate rise going to impact cashflow? Will adjustments be needed to payments on account, or increased guarantees given for deferment amounts?
- Have you thought about what VAT rate applies to supplies that span 4 January 2011?
Implementation issues that we're assisting organisations with include:
|Tax codes: Accounts payable and accounts receivable teams will now have three standard UK VAT codes (15%, 17.5% and 20%) to choose from and, therefore, will face an increasingly manual decision making process. Systems automation can reduce manual interventions, so many organisations are considering whether now is the time to automate some VAT reporting processes.
Special rules: HMRC have issued a 50 page guidance manual outlining special rules for (i) supplies that span the 4 January implementation date, (ii) property transactions, (iii) international trade, (iv) pre-payments and deposits, (v) retail businesses, (vi) payments on account; (vii) construction services, and many more issues. These rules are complex for some organisations but also provide opportunity to minimise the rate of VAT that apply to supplies that span the rate change.
Process improvement: Many organisations have coped with the recent rate changes by working around their systems. Examples of this include hotels are considering checking guests out at midnight on 3 January and checking them back in at 12.01am on 4 January, or tax departments that are manually adjusting the rate of VAT that applies to supplies prior to submitting the VAT return. Many of these manual processes could be automated, saving time and increasing consistency and accuracy.
What's your strategy?
The Government has issued a number of statements on what they believe will be the wider economic impact of the VAT rise to 20%. These include:
Drawing on evidence of domestic and international changes in VAT rates, we judge that around two thirds of the VAT increase will be passed on relatively quickly to prices. The increase in prices lowers real increase and hence, all else equal, consumption. The remaining incidence of VAT increase is borne by the firm.
HM Treasury, Budget 2010
The level of real consumption is weaker than in the pre-Budget forecast, particularly in 2011 and 2012, as lower household incomes and the rise in VAT reduce household demand.
Office for Budget Responsibility, June 2010
Firms are expected to absorb some of the rise in VAT through lower profit margins and not to pass through the full increase to consumers. As a result company profits as a share of GDP are lower by 0.4% in 2014 [£11bn] than in the pre-Budget forecast.
Office for Budget Responsibility, June 2010
From these statements we can surmise that:
- Organisations and consumers will share the £65bn additional tax, roughly 25:75
- The c75% cost passed onto consumers will reduce demand
- The c25% cost absorbed by businesses will reduce margins
Organisations need to determine how they will be impacted by the VAT rate rise. The expectation is that £65bn over 5 years will be raised by a 2.5% hike in VAT, so how much of this increased burden are organisations prepared to bear themselves?
The answer to this question will inform the next decision - to what extent will the additional cost of VAT be passed onto customers and suppliers?
Regardless of the strategy set, we recommend that organisations next look to focus on mitigating the effect of the rate rise, both for themselves and their customers.
How will you mitigate?
There are hundreds of ways to lessen the impact of the rate rise. These include generic ideas that apply to all organisations, and sector opportunities that apply to specific types of business, such as those who cannot fully recover VAT.
Deloitte can work with organisations to identify the most appropriate and effective mitigation opportunities. Often this is a case of spotting 'good housekeeping' tactics as opposed to a large scale re-engineering of the way you do business.
Case study - UK charity
This charity managed VAT costs very carefully on the basis that it was not entitled to recover VAT incurred on costs. Our review identified only one issue: invoices received for advertising (online, print and radio) were not coded to an advertising cost centre and, therefore, the charity couldn't carry out a central check to ensure that the zero rating relief for charity advertising had been applied. A systems change to introduce an advertising cost centre is forecast to reduce VAT costs by £100,000 over the next 12 months.
Case study - Retailer
A review identified no compliance issues. However, the client and review team identified more efficient ways of calculating the VAT due on "meal deals" where standard and zero rated food items were sold as a package for a single price. A simple change in the calculation methodology generated a £75,000 annual saving.