CHARITIES MAY BE BIG LOSERS WITH VAT HIKE (09/07/10)

Probably the biggest story from the recent ‘Emergency Budget’ was the surprise increase in the VAT rate from 17.5% to 20% from January next year.

While this is bad news for individual consumers it generally will not have much impact on most businesses  - apart from the administrative costs of dealing with a VAT rate increase. Most businesses are able to fully reclaim all the VAT they are charged so overall there is no negative impact.

However, where organisations are not VAT registered they will incur more VAT of which they will not be able to recover – increasing their overall costs.  This problem particularly affects charities but will also be a problem for insurance companies and banks.

There are specific rules, termed the anti-forestalling rules, in place to prevent agreements where suppliers invoice in advance for services – therefore taking advantage of the 17.5% rate.

However there may be some scope for certain suppliers to invoice in January next year for work to be performed for the year ahead to take advantage of the 17.5% rate.

And, while the amounts involved may not be substantial, small savings may be important for some charities.

The increase in the VAT rate may also prompt more charities to look at their VAT status in detail. In some cases charities may be able to become partially exempt from VAT – which means that they may be able to recover some of the VAT they incur.

This is a complex issue and charities should certainly take professional advice regarding this. Overall the increase in the VAT rate will certainly be painful for consumers – charities may also be the unintended victims of this change.