Thursday, November 12, 2009

When Will VAT Return to 17.5%?

On 1 December 2008 the UK VAT rate reduced from 17.5% to 15%.

This change, instituted at one week's notice, was intended to boost consumer spending at Christmas, and was scheduled to last for 13 months. Which means that it will end on 31 December 2009. But will it?

Changing the VAT rate at short notice was a major headache for many organisations, large and small. Returning it to 17.5% should, in theory, be easier. It's simply a reversal of the process that took place last December. Businesses also have the advantage of being able to plan; they have 13 months notice rather than the seven days of last year.

However, there's scope for uncertainty over when the VAT rate will change. Officially it's still scheduled for 31 December. HMRC have just issued guidance for businesses still trading at midnight on 31 December - many pubs, clubs and hotels will be full of New Year revellers intending to party into in the small hours of January 1st.

Last year's announcement of a VAT rate reduction was made as part of the Pre-Budget Report. The Chancellor opened his report with the words "these are extraordinary, challenging times for the global economy". What's changed since then?

A year later we're allowing ourselves some optimism. There's talk of rising house prices once more, something of a barometer of the UK economy. Retail sales are picking up and, according to consultants Mercer, employers are talking about pay increases next year.

There's a train of  'almost good news'. Yesterday saw the Governor of the Bank of England deliver a quarterly inflation report with guarded optimism; tough times ahead but the worst is behind us. At the same time the latest unemployment figures revealed the rate of increase had declined, something economists weren't expecting to happen so soon.

That said, there have been plenty of announcements of job cuts this week from various organisations including Lloyds Bank. Behind the statistics real people are still fearful of losing their jobs.

So will the Chancellor keep VAT at 15% a little longer than planned? He's now announced this year's pre-budget report will be released on Wednesday 9th December; so that's when we'll know for sure.

The signs are that that the rate change will happen as scheduled. But you can be fairly certain that decision is not yet cast in stone and there's still scope for it to change. It all depends on what shape the economy is judged to be in at the end of this month.

There's one more factor to take into account. Politicians love positive headlines, particularly when there's an election looming. This will be the last Pre-Budget Report before the country goes to the polls. I'm confident that Alistair Darling will be looking to grab some attention with his announcements on 9th December - so be prepared for some surprises. Will a change to the date of the VAT rate increase be one of them?

Andrew Knowles is a freelance copywriter.


stephen said...

Having spent a significant sum on a house extension over the past year the VAT reduction has been an added bonus, even as a small compensation for no salary increase. As for optimism, anybody working in construction (as I do) has yet to see any. We're in survival mode for the forseeable.

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