It’s widely rumored in the mainstream press that the clever fellows at Downing Street will cut the main rate of VAT from 17.5% to 15%. Bravo, tax cuts should generally be applauded. What’s troubling me though is that those same clever fellows don’t have a particularly good record of er, well, being very clever. When Brown abolished the 10p starting rate of tax he pain failed to see or understand the consequences of his action. He made swathes of low earners worse off and had to conceed the gaff in parliament in an embarassing u-turn.
Tax in this country is complicated. Very complicated. I know this because I advise tax payers. When VAT was introduced in the UK on 1st April 1973 it was described by the chancellor of the day as “a simple tax”. A tax so simple that it took a court to decide if a jaffa cake was a cake or a biscuit. HM Revenue and Customs wanted it classed as a biscuit so they could tax it, biscuits being a luxury item and cakes apparently being a necessity, biscuits are standard rated goods taxed at the main rate of VAT, cakes are Zero rated. We have exemption, partial exemption, opted to tax, not opted to tax, second hand goods schemes, cash accounting, retail schemes and the flat rate scheme amongst other things to get ones head around.
So lets take the flat rate scheme as an example. Lets say a small business is currently in the flat rate scheme. Every invoice that that business raises for standard rate supply, we’ll assume here that all supplies are standard rated, needs to carry a vat charge on it at 17.5%. Lets say this particular scheme means the business has to pay over 13% of its gross revenue in vat under the terms of the flat rate scheme. This is the current state of affairs:
Fees charged £1000 + vat of £175 = £1175.
Due to lazy B on benefits Mr Brown 13% of gross = £152.75
Deemed input to offset against real vat incurred = £175 – £152.75 = £22.25
No need to keep detailed complicated vat records, thank you very much.
OK, now lets suppose those cunningly clever chaps at Downing Street woo the country tomorrow with a cut in VAT from 17.5% to 15%, lets do the maths again….
Fees charged £1000 + vat of £150
Due to MP’s pension fund Mr Brown 13% of gross = £149.50
Deemed input to offset against real vat incurred- £150 – £149.50 = £0.50p
Hum… it seems that 97 and 3/4rs percent of the input relief has vanished. Where the small business got £22.25 contribution towards its VAT overhead it now gets £0.50p
I may be pleasantly surprised tomorrow and they may deal with this problem in some blindingly obvious simple way that doesn’t involve gallons of midnight oil to understand. I sincerely hope they do, but I’m weary of this administration and their ability to cock up everything they do.
Comments on this entry are closed.