The Chancellor announced a number of changes in respect of VAT and indirect taxes in his Pre-Budget Report and the press releases made following it. The main changes are:
Summary
- As widely forecast before the announcement, the standard rate of VAT will be reduced from 17.5% to 15% from 1 December 2008. The reduction will be temporary and the rate will revert to 17.5% from 1 January 2010;
- The proposed introduction of an aviation duty to replace air passenger duty (APD) will be scrapped and instead there will be an increase in the number of APD bands from 2 to 4;
- Proposed increases in vehicle duty will be reduced and new bands will be introduced;
- There will be an increase in alcohol, tobacco and hydrocarbon oils duties to make good the reduction in VAT on these products; and
- There are changes to monetary limits in the VAT retail schemes and the eligibility rules for the flat rate scheme.
The CIOT is inviting comments on issues that arise from the changes. These should be sent to technical@tax.org.uk with 'VAT changes – FAO Maric Glaser' in the subject line.
Reduction in the standard rate of VAT
HMRC have issued a number of documents to assist businesses in dealing with the change in the standard rate of VAT. These can be found on the HMRC website on the following links:
In addition, HMRC have provided guidance for answers in a question and answer format at http://www.hmrc.gov.uk/pbr2008/consumerqa.pdf. The guidance notes in relation to the obligation of businesses to pass on any benefit:
“Ultimately, however, decisions on prices, charged by businesses and paid by consumers, are for businesses rather than the Government.”
There will be further announcements on this change today (25 October 2008) concerning anti-forestalling provisions. Such provisions are routine when there are changes in the VAT rate, and are intended to prevent VAT avoidance schemes that seek to apply the reduced rate for a longer period than intended by Parliament.
One of the main problems for business will be the large amount of work that has to be done on accounting systems within a short period. The documents issued by HMRC provide some guidance but, ultimately, each accounting system is unique and businesses have to decide their own response. In many cases, the cost of changes may require a business to withhold some of the benefit of the rate change from customers. This time, businesses will know that a further change will happen and should prepare for the increases that will take place from 1 January 2009.
Aviation duty scrapped
The Chancellor announced that the proposed aviation duty would be scrapped. The Treasury has published a document setting out a summary of the responses that were made to the consultation on aviation duty. This may be found at: http://www.hm-treasury.gov.uk/prebud_pbr08_aviationduty.htm.
Apart from negative feedback from people active in the aviation field, the Treasury considers that the inclusion of aeroplane emissions in the EU Emissions Trading Scheme will provide an alternative means of controlling emissions and so avoid the need for more direct action.
Duties
Various changes have been made to vehicle excise duties and to alcohol, tobacco and hydrocarbon oil duties. Motorists will be helped by effectively reducing planned increases in duty while the other duties are increased to ensure that consumers of such products do not benefit from the VAT reduction.
Other VAT matters
There is a change to the limit above which a retail business may not use the published retail schemes. At present, the limit is £100 million, but this will be raised to £130 million.
The Government also plans to simplify the flat rate scheme by amending the eligibility criteria. This will only affect small businesses that are either already on the flat rate scheme, but are approaching the turnover level at which they cease to be eligible, or are new businesses wishing to enter the scheme. The changes include amendment of the rates to be applied by small businesses.
Comments are particularly requested by the CIOT on any issues that relate to small businesses. Please send comments to technical@tax.org.uk with 'Small Businesses VAT change - FAO Maric Glaser' in the subject line.
Technical Department
020 7235 9381
