VAT’s it all about?


Confused by the increase in VAT? Our friendly accountant (and Journal columnist) Jamie Crampton gives us the low-down on it.

He writes: “ VAT was increased on the 4th January 2011 by 2.5% to 20%. For any VAT registered businesses this means that anything they sell (which is VAT-able) on or after this date must have VAT charged at 20%.

“The people most affected by the increase are general consumers, because the vast majority of them will not, unlike businesses, be able to reclaim VAT on anything that they buy. Similarly, smaller non-VAT registered businesses will have to absorb the extra costs. There are, however, some key things to remember:-

  • The increase refers only to the VAT element of the cost of the goods concerned.

As an example:- If an item cost £100 before the VAT increase, then the VAT within that total cost (at 17.5%) is £14.89, making the net cost £85.11. If we then add VAT at the revised rate of 20%, i.e £17.02, the total cost now is £102.13 – which is an overall increase on the total price of 2.13%, not 2.5%.

  • Certain items are exempt from VAT and therefore will not (or should not) increase in price simply because of the change in VAT rate. Examples of these include:-

a. Most food

b. Children’s clothing

c. Insurance

d. Transport fares (train/bus) and

e. Books.

Similarly some items are taxed at a lower VAT rate which has not increased from 5% – domestic fuel being the primary example.

“There is little doubt that some businesses will (and have) use the general public’s limited knowledge of VAT to justify price increases over and above the rises that should happen, at the moment supermarkets are making big noises about not increasing their food prices despite the VAT increase – as you will see above some of these items are exempt from VAT and, therefore, shouldn’t be increased anyway.

“The biggest impact will undoubtedly be the rise in fuel costs – unfortunately motoring costs are, to most businesses, unavoidable. There are several websites that will direct you to the cheapest petrol station in your area, but in general with fuel, as with everything else you spend on, it will be a case of “shopping around” – one small benefit about a rise in taxation hopefully is that people place more emphasis on controlling what they spend, which should but doesn’t always happen anyway.

“If your business is registered for VAT then you may want to look into some of the schemes that are available – whilst they don’t change the amount of VAT that you charge there may be one that is beneficial for you and may save you money.  The HMRC website (www.hmrc.gov.uk) has details, or you can ask a reputable accountant.”

 

 

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