Happy new year and and a happy VAT rise

by scotslawstudent

I wish a very happy new year to any and all readers of the blog. You’re awesome.

You will almost certainly have heard that the VAT rate is returning to its pre-credit crunch level tomorrow — 17.5% from 15%. The people complaining most bitterly about this are the retailers who claim this unreasonable 1/40 th increase in prices will kill off any recovery and kill their businesses.

Don’t believe it. VAT can be a wonderful thing for businesses because of a thing called “input tax” — businesses rated for VAT don’t pay VAT themselves, in fact they get to claim back any that they’re charged and offset it against any VAT that they themselves charge (“output tax“). That means that if you pay more VAT than you charge you actually get a tax rebate. For example charities that produce “zero-rated” goods and services can end up getting a quite substantial amount of money from Her Majesty’s Revenue. Effectively it means that just about everything your company buys costs you 15% – 17.5% less than it would cost a normal person.

As far as businesses are concerned there is simply a little bit (2.5 pence in every pound) more money going to and from their accounts than when the tax rate was reduced from exactly what it’s now going back to. It may impact profitability but as far as cashflow is concerned it can be balanced out by an identical increase in the amount of rebate-able input tax — you’re charging an extra 2.5% on your goods, but you’re also claiming an extra 2.5% back on your purchases. The scales of commerce have not suddenly become unbalanced.

On the other hand if you’re not a VAT rated company, if your products are tax exempt or, heaven forbid, you’re just a consumer then you should be a bit annoyed because VAT hates you and you can’t claim anything back.