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VAT @ 20% – some hidden implications


On 4 January 2011 the standard rate of VAT will rise to 20%.


 Mark Peters,


Associate Director, VAT


As this is the third time the rate has changed in just over two years many businesses might feel reasonably comfortable managing the transition – past experience should stand them in good stead when it comes to issues such as re-pricing, accounting system changes and tax point issues. However, this recent hike represents a journey into unchartered territory, and it will raise new issues.


Highlighted below are a few of the more esoteric implications of the rate rise that businesses need to be aware of.


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International trade – if you regularly import goods and maintain a deferment account facility, the bank guarantee may need to be revised upwards to take account of the increase in the VAT rate. This may have potential implications on other facilities made available by the bank.


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Partial exemption – businesses with incidental exempt income will find it harder to avoid partial exemption by staying under the de minimis limits. With additional VAT being incurred on purchases it is more likely that these limits will be breached.


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Capital goods scheme – in the same way more businesses will suffer capital goods scheme adjustments on (in particular) property developments and purchases.


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Payments on account – again these thresholds have remained unchanged. With a greater


throughput of VAT more businesses will find themselves with an annual liability exceeding £2m, requiring them to make monthly payments on account. For those affected the cashflow implications could be significant.


Capital purchases – the level of finance required to fund capital purchases will need to increase. For many businesses any VAT charged is recoverable in full; however recompense from HM Revenue & Customs is rarely instant. Businesses will have to fund a greater amount of tax for the period between the supply and when credit is obtained on submission of the VAT return. This point is particularly relevant for property transactions, and makes it more important for ‘transfer of going concern’ status to be achieved wherever possible.


Interest and penalties – with a greater throughput of VAT on the VAT return the value of any errors are likely to increase. In turn this will lead to an increase in the value of any interest and penalties charged, as these are generally calculated as a percentage of the tax due. Given the recent changes in the penalty rules, this increases the importance of businesses being able to demonstrate ‘reasonable care’.


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Stamp duty – this is payable on the gross amount so any increase in VAT will also increase stamp duty costs in relation to property purchases.


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Flat rate scheme – smaller businesses should review their use of this scheme. Flat rates should change to reflect the rate rise, but in some cases the financial result may not be neutral. Existing users should check the numbers and determine whether they are still better off, and vice versa for businesses on standard accounting arrangements.


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