28 days and counting!
There are now just 28 days and only two full working weeks until the most significant rise in UK VAT history. And only one week if you’re one of those businesses who closes up shop before Christmas Eve. That’s not a lot of working days to make sure that your revised prices and systems and financing arrangements are all in place for the 20% rate.
The monetary value of the rate increase will be the same as it was last year, when the rate reverted to 17.5%. And of course most of you will be prepared simply because you’re going through the same processes that you put in place last year – this generation of businesses is certainly very experienced when it comes to dealing with VAT rate changes.
But there is a real psychological factor about the rise to 20%. It means that ONE SIXTH of the money that we spend on standard rated goods and services is tax. For us final consumers, that’s quite a chunk of change. And – forgive me for being cynical – once you cross such a significant rubikon, it might indeed be difficult to return. The standard rate in many EC countries is already over 20% and I can’t help thinking that now we’re getting used to the idea, the government won’t want to bring it down again. Depending on which authority you read, a 2.5% increase in the standard rate of VAT will generate some £5 billion of additional tax revenue and the government needs every bit of that money to deal with the current financial situation.
I’m not saying that I think that the rate will go up again any time soon, I just think that once it’s here, the 20% VAT rate will become the norm and increase the importance of the VAT system to the UK revenue. VAT is already one of the largest sources of income to the government and some would say a progressive way of raising revenue. If anything, it makes it even more important that we retain the zero-rate of VAT that applies to food, childrens clothing, new housing and other necessities.
So are you ready for it?
Apparantly only 10% of businesses are prepared for the VAT increase. That means that the remaining 90% of us have only a couple of weeks left! Of course it’s the consumer – yes that’s us too – who will bear the brunt of the rise, but I was listening to an interview with the CEO of Amazon UK at the weekend and he thought that the majority of consumer pricing wouldn’t be affected very much by the change. We consumers are apparantly quite a cunning lot and are very good at looking round on the internet for the best deals on major items of expenditure, such as cars, computers, TVs and other electrical goods. The Amazon guy thinks that retailers will probably bear most of the rise simply becuase the UK retail market is so driven by competitive pricing.
I suppose that’s true to a large extent. Anyone who has braved Christmas shopping crowds and/or the January sales knows how people are good at spotting bargains and how far they’ll go to bag one! But my main concern is – as always – the small businesses, retailers and domestic service providers whose turnover is less than £100k per annum and for whom absorbing a 2.5% increase will eat into an already limited profit. If your annual personal income from the profits of a £100k turnover business is £25k, then the effect of the increase could be to reduce that income by some £2k. Most employees get upset if their employers impose salary freezes, arguing – correctly – that such action is actually a salary reduction when the cost of living is on the rise. But that’s still better than a small business owner who could see their personal income reduced in real cash terms. About time the EC imposed a small business VAT rate on all member states.
So try to make sure that you’re making the necessary preparations for the rate increase so you’re not caught out on 4 January. If you’re a retailer needing to raise prices, remember that the fraction that you need to apply to existing VAT inclusive prices for standard rated items is 1/47. And the new VAT fraction from 4 January is 1/6.
In the meantime I hope the run up to Christmas is proving busy and profitable and that you’ve not had to dig your car out of the snow too many times……
Marie