The last few days has seen an explosion of rumours that both Labour and The Conservatives are planning to increase VAT to 20% if they should win the election. How likely is this and what preparations should we take just in case?

How likely is an increase in VAT to 20%?

The United Kingdom has one of the lowest rates of VAT in the EU. Compare the rates in this table and you'll see that most EU Member States have VAT rates of between 19% and 25%. The UK also has the only Zero-Rate for essentials such as food, books and childrens' clothes, making the effective amount of VAT paid by an individual even lower.

We know that Labour is not averse to messing around with the VAT rate having already imposed 2 changes on us within 13 months. The Conservatives have also shown themselves willing to muck around with the rules, removing the Zero-Rate that formally applied to fuel used for domestic purposes, increasing it to "Lower-Rate", which was 8% at the time.

Germany increased their VAT rate from 16% to 19% at the start of 2007 and, despite dire warning from some experts, its economy didn't suffer too greatly. Although, it must be remembered that this happened before the Credit Crunch driven downturn.

Compare these facts to the apparent reluctance to mess with the main income or corporation tax rates in recent years, together with the massive budget deficit that promised spending cuts alone do not seem sufficient to close, and it would appear that a VAT increase is at least possible.

How should we prepare?

An increase in VAT of another 2.5% is likely to be introduced at short notice. With the exception of the most recent increase from 15% to 17.5%, increases in the rate of VAT are generally announced very shortly before they take effect. This minimises the potential for big businesses to implement VAT planning schemes that avoid the effect of the increase.

Following the 2 recent changes, businesses should, at least, be well versed in amending their accounting systems to reflect the new VAT rate. However, it will be worth making sure that this knowledge is documented and retained in case of staff changes before any increase is announced.

Businesses and/or organisations that cannot recover all of the VAT they incur may wish to consider any large expenditure that they are likely to be making in the next 2 years. It may be possible to bring forward the purchase of some, if not all, of the cost of this to ensure it is made whilst the VAT rate remains 17.5%.

Businesses who supply services or regular supplies of goods to individuals or organisations that cannot recover VAT may wish to be ready to invoice all work completed or good supplied to date immediately any increase is announced. This should ensure that the invoice can be issued with a 17.5% rate of VAT, saving customers and clients money. It may also improve your cash flow with earlier payment.

When is this likely to happen?

Traditionally, such major changes to the tax system are made only in the Budget or Pre-Budget Report. It is unlikely that Labour would make such a move in their last Budget before the election. The earliest at which the subsequent elected party is likely to make a change is, therefore, in the 2010 Pre-Budget Report which usually occurs in November. Unless, that is, they consider the situation to be so pressing that they make a snap Budget announcement earlier in the year.

We would recommend, therefore, keeping an eye on the press for any suggestion of such a snap announcement.

Where can I get help?

Aardvark VAT Resources would be happy to provide assistance and/or advice on this or any other VAT matter. Please contact Paul on This e-mail address is being protected from spambots. You need JavaScript enabled to view it or 07973 956163.