UK Announces Reduced VAT 'Extension'

by Robert Lee, Tax-News.com, London

06 November 2009

HM Revenue and Customs (HMRC), the UK tax authority, has announced that the 15% reduced rate of value-added tax will be extended beyond its year-end expiry, but businesses will be somewhat disappointed to learn that this extension will only last for a maximum of six hours.

Financial Secretary to the Treasury, Stephen Timms confirmed that pubs, clubs, restaurants and other retail businesses remaining open past midnight on New Year’s Eve will be allowed to continue charging VAT at 15% on their sales until they close or until 6am on January 1, 2010, whichever is the earlier.

Commenting on the decision, Timms observed that: “New Year’s Eve celebrations are a vital source of income for many in the service sector. The government recognizes that it would be very difficult for them to make the necessary changes to account for VAT at 17.5% immediately after midnight."

"To make the transition as easy as possible retail and telecommunication businesses will be able to charge VAT at the old rate into the early hours of New Years Day."

Timms announced in May 2009 that HMRC would be allowing a ‘period of grace’ to help businesses trading across midnight on December 31 in implementing the VAT rate change, and that they would work with business on the details.

The idea behind the temporary 2.5% VAT cut, which was announced in the 2008 pre-budget report and applies from December 1, 2008 to December 31, 2009, was to help nurse the British economy through one of the toughest economic climates in decades.

However, most would consider this to have been a failed measure because it was costly for retailers to implement, has caused no discernable increase in consumer demand, and has been expensive in terms of revenues foregone for the government at a time when it can ill afford to be profligate.

The Chartered Institute of Taxation has estimated that those earning GBP20,000 or less per year are saving about GBP2.50 per week in VAT, while those on higher incomes of GBP60,000 per year or above will have about GBP6.50 per week more to spend.

As the 2009 pre-budget report approaches, speculation is growing as to what Chancellor Alistair Darling plans to do with regard to VAT.

According to accountancy firm MacIntyre Hudson, he is quite likely to extend the 15% rate, at least for another month, although he may well decided to cut his losses and hope for a consumer spending splurge in the run-up to Christmas as shoppers aim to cash in before the rate reverts to 17.5%.

Others have suggested that a rise beyond the standard rate may be on the cards as Darling attempts to balance the government's books.

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