Tag Archive | "vat increase"

Contractor accountants’ prices rise due to VAT increase


Contractor accountants may be interested to learn that research from PwC suggests that last year’s VAT increase caused overall prices to increase by about 1%.

Consumers who were already struggling with rising food and energy prices saw a VAT rise from 17.5% to 20% at the beginning of 2011.

However, the chief economist at PwC, John Hawksworth, said the increase had a temporary effect and should not have an adverse impact on inflation or growth this year, providing there is no further increase in the rate of VAT.

He went on to point out that the VAT increase did have been some positive effects; at least as far as the UK economy goes. We now a smaller budget deficit and a lower long term interest rate.

Stephen Coleclough, a partner at PwC, explained that other countries in the European Union are following the UK’s lead and raising their VAT rates. France and Italy have both increased VAT, whilst the rate in Hungary has risen to 27%.

VAT increases are inflationary and intended to raise revenues. They also need to be set to meet the growth needs of individual nations, he added.

People in Ireland saw their VAT rate increase from 21% to 23% on the first of January this year. Originally the increase was to be implemented in two stages but it was decided to bring the rise forward to limit damage from the Euro crisis.

The Italian government raised VAT by 1% to 21% last September. A further 2% increase is expected in September this year, followed by a possible 0.5% rise at the start of 2014.

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VAT increase was a sensible move, say SMEs


Nearly half of the UK’s SMEs have agreed that the government made the right decision to increase VAT.

Intuit, the producer of QuickBooks financial software, conducted a survey of small business owners and found that 44% support the VAT increase as a means of tackling the fiscal deficit. 13% believe that increasing income tax would have been a more effective alternative.

It also appears that, at least so far, the VAT increase has not had a serious impact on the majority of small businesses. 67% of the survey’s respondents said the rise had not impacted their business.

39% of SMEs decided to absorb the full VAT rise rather than increase prices to their customers. According to nearly 70% of the surveyed businesses, the increase cost them less than £350 to implement and slightly less than 50% claimed to have spent less than 5 hours on its implementation.

However, business confidence is still fragile and cashflow is starting to show signs of strain. The increase in fuel duty is a further concern for businesses, points out the FSB’s national chairman, John Walker.

Meanwhile, experts believe that we are unlikely to see many tax concessions when George Osborne delivers the Budget in March.

The Green Budget, published by the Institute of Fiscal Studies and Barclays Wealth, claims that fiscal loosening could be counter-productive if it leads to an offsetting of financial tightening.
Michael Dicks, from Barclays Wealth, said he expects the UK economy will grow at much the same rate as the OBR has predicted, but the risks are skewed to the downside.

The Green Budget report welcomed the reduction of corporation tax but said the ‘Patent Box’ will add needless complexity to our taxation system.

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Accountants for contractors will be deducting more tax from you soon!


Freelancers could be encouraged to ask for advice from a specialist contractor accountant after one financial body revealed that changes to the income tax bands, due to be introduced in April, will lead to an additional 750,000 paying higher rate tax.

In the coming tax year, individuals earning between £35,001 and £150,000, will be taxed at 40%. Currently, people pay the higher tax band on earnings above £37,400.

The Institute of Fiscal Studies launches its Green Budget today which will also reveal that an additional 850,000 individuals will fall into the higher tax rate bracket within the next 4 years if the coalition meets its targets.

A spokesman from the Institute said that real earnings are expected to remain stagnant but householders will face an additional loss of around £200 a year from benefit cuts and tax increases that come into force at the start of the new tax year. This is on top of the VAT increase and higher energy and import prices.

The wealthiest 10% of the population will also have to pay a new tax rate of 50p in the pound on income over £150,000. This will mean that they are losing 3% of their income compared to the average 1% for the rest of the population.

The tax band changes will mean that 500,000 people do not have to pay any tax at all. April’s increase in the personal allowance from £6,475 to £7,475 is the first step in the government’s plan towards raising the personal tax threshold to £10,000.

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VAT increase will be detrimental to the wealth of SMEs


VAT rose to 20% on Tuesday and over 70% of small firms think this will impact negatively on their business.

The FSB conducted a survey of its members and 71% of the 1,600 respondents said the increase will not be beneficial to their business. 52% said they would have to increase prices, 45% expect turnover to decrease and 36% believe the rise will result in a loss of customers.

George Osborne says the increase is here to stay but the FSB is urging him to return VAT to 17.5% once the fiscal deficit has been reduced significantly.

SMEs will be hardest hit by the VAT increase as they are unable to absorb it in the way larger organisations can. The majority of small businesses will have to pass on the full rise to their customers, reduce their level of stocks or look to implement alternate cost saving measures.

The Federation has also called on the coalition to raise the threshold at which firms start to pay VAT to £90,000 from the current £70,000 rate. It says this move would help SMEs and could generate up to 35,000 additional jobs.

The chancellor has defended the rise, saying it shows the government is determined to tackle the budget deficit and this should lead to increased employment. Ed Milliband, on the other hand, believes the increase will cost 250,000 jobs.

Meanwhile, Jason Collins, a partner at law firm McGrigors, has warned that carousel fraud may make a comeback due to the VAT increase.

Carousel fraud occurs when a business purchases VAT-free products from one country, sells them on in a different country and then vanishes before settling the VAT liability. This type of fraud had died down in the UK but Collins warns that the increase could see VAT fraud doubling to £4bn this year.

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Contractor accountants won’t be free from tax until May 30th


Contractor accountants may be interested to know that Britons will not start earning for themselves until May 30th this year, due to the VAT increase which comes into force today, January 4th.

The Adam Smith Institute has said that all monies earned between the 1st of January and the 29th May 2011 will belong to the taxman. On May 30th, Britons then begin working for themselves; a date coined Tax Freedom Day by the Institute.

This year, Tax Freedom Day is three days later than it was in 2010 and this is largely attributed to the increase in VAT from 17.5% to 20%.

The executive director of the Institute, Tom Clougherty, said the impact of the VAT rise will affect every household in the UK, denting consumer confidence and putting a dampener of the country’s economic recovery.

The coalition is correct to prioritise spending cuts and repairing the budget deficit but people in the UK remain seriously overtaxed. We spend nearly five months working solely to support the state and only seven supporting our families, which is a shocking indictment of a large and wasteful government, he added.

The OECD revealed last month that the tax burden in Britain is higher than in many of its peer countries, having increased since 1995. Taxes exceeded 34.8% of the OECD GDP in 2008, even though they have fallen in recent years.

Canada, Ireland, New Zealand and the U.S. have all reduced their tax burden in the last fifteen years and even countries like Denmark and Sweden, which levy high taxes, have reduced them. But the burden of taxation in the UK has risen by about 1.5%.

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The VAT increase is near but are contractor accountants’ clients prepared?


Although UK businesses have had plenty of warning that VAT will increase to 20% at the beginning of January, almost 20% of small businesses are still not prepared.

Business software provider, Sage, conducted a survey of 1,500 SMEs and discovered that 11% have not even thought about the increase and another 7% are worried that they have not done enough to prepare for the change.

This change will not necessarily be as daunting a task as it was previously. We’ve had two changes in the last couple of years, so it’s not as if contractor accountants and businesses are faced with a completely new phenomenon. Small firms will have to decide whether to pass on all or some of the increase to their customers, or absorb the full amount themselves.

The other problem for businesses this time around is that the increase does not take place on the first of a month. Therefore some firms will need to complete VAT returns showing two different standard VAT rates. If business owners are in any way unsure of how to proceed, they should contact a contractor accountant for advice.

Meanwhile, third-sector employers who are not registered for VAT could find January’s increase represents a commercial nightmare, according to the MD of Cash Simply, David Thornhill.

The standard rate of VAT will rise to 20% as from the 4th of January next year and the Charity Tax Group estimates that this will increase costs for the third sector by an extra £140 million.

Employment businesses must charge VAT on the wages of the workers they supply. Businesses that are registered for VAT claim this back as input tax on the VAT returns, but charities are not VAT registered and therefore they cannot reclaim this cost.

However, there is a way around this problem, Thornhill explains. If a temporary worker was to be engaged on a short-term contract and the charity outsourced the payroll processing to an independent payroll company that also funded the wages, invoiced them separately and was effectively the charity’s PAYE agent, the unrecoverable VAT would be removed from their costs.

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Are you ready for the VAT increase?


11% of businesses have still not prepared for the VAT increase which comes into force on January 4th next year, according to the results of research conducted by Sage.

In November, the software provider conducted a survey of 1,500 of its customers about the impending change. Over two thirds (68%) of the respondents said they were prepared, but 11% had not yet considered the implications of the increase.

Adapting systems to cope with a different VAT rate should not be so daunting this time around. A couple of years ago, the rate was temporarily reduced to 15% before returning to 17.5% at the beginning of this year.

The main problem, at least as far as SMEs are concerned, is whether to pass the increase on to customers. Dr Philpott from the CIPD says that smaller-sized retailers will be most affected by the change and yet the government is banking on such businesses to create employment and help drive economic growth.

However, a spokesman for the British Retail Consortium has said that online retailers are in a better position to absorb the increase than their high street counterparts, due to lower business overheads. eBay’s Online Business Index seems to confirm that view showing that 63% of online retailers are not expecting to pass the full increase onto their customers.

Contractor accountants may also find more people contacting them for help completing quarterly VAT returns. As the rate rises on the 4th of January rather than the first, some companies will need to file a return which incorporates both the 17.5% and 20% standard VAT rates.

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There may be trouble ahead for smaller high street retailers


Contractor accountants who have small business clients in the retail sector could be concerned to hear that the British Retail Consortium’s belief that the increase in VAT could cause problems within the sector.

As from January 4th, the VAT rate will rise from the current 17.5% to 20% and the BRC thinks that online retailers will find it easier to absorb the rise than the high street stores will.

A spokesman for the BRC pointed out that online businesses have a distinct advantage over their high street counterparts; they spend a lot less on overheads. Potentially, their margins are slightly broader so they have the opportunity to absorb the increase.

This suggestion is in some ways backed up by a recent survey from eBay. It’s latest Online Business Index shows that 63% of online retailers hope to be able to absorb at least some of the increase. 24% say they are confident in their ability to absorb the full VAT rise so that prices will not have to increase, but 23% of internet traders will be passing on the full increase to their customers.

Around 50% of the survey’s respondents think the increase will have a detrimental effect on their business and lead to a reduction in sales.

Dale Atkinson, from the BRC, said that there will be increased competition between retailers over the coming months as companies look for ways to minimise the impact of the VAT rise on their customers.

Contractor accountants could be in a good position to advise retailers on the best ways to cope with the increase and still maintain profitability.

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