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Pre-Budget Report 2008

VAT rate cut to 15%

The standard rate of VAT is to be cut by 2.5% to 15% with effect from 1 December 2008. The reduction will apply for 13 months, returning to 17.5% from 1 January 2010. The new VAT fraction will be 3/23.

Only standard-rated sales are affected. There are no changes to sales that are zero-rated or reduced-rated for VAT. Similarly, there are no changes to the VAT exemptions.

The one month payment deadline to pay Vat bills remains unchanged.

Flat Rates reduced

Small businesses using the VAT Flat Rate Scheme may now need professional advice to work out if it is still worthwhile using the scheme. Most (but not all) of the Flat Rate percentage rates have been reduced from 1 December 2008, but generally not by the full 2.5%.

Bookkeeping

The reduction is also likely to cause problems for bookkeepers. For example, the 14 day rule means that the old rate of VAT will still apply to invoices issued in December 2008 where goods were supplied more than 14 days before the invoice date. The old rate also applies if payment was made in advance before 1 December. Credit notes against old invoices will need to apply the original VAT rate, not the new one.

All this means calculation challenges for both manual and computerized accounting systems. This is particularly concerning where businesses use cash accounting, where over the next few months VAT will have to be accounted for at both 17.5% and 15%. If, for example, receipts and payments are not allocated against unpaid invoices as they are entered the software will almost certainly calculate VAT at the wrong rate.

Cash registers and electronic tills may need to be reprogrammed for next Monday –how many traders know where the instruction manual is?

Looking ahead

There are potential cashflow problems for some businesses which will struggle to pay the 17.5% VAT due for VAT quarters including periods up to 30 November 2008 over the next few months while collecting only 15% from their customers.

 

 

Personal tax

The temporary personal allowance increase becomes permanent
The temporary £120 personal allowance increase that was a government response to its own abolition of the 10p tax rate has now become permanent.

A new tax band for earnings over £150,000
Those earning over £150,000 a year will face a new 45% tax band from April 2011.

Personal allowances to change for those earning over £100,000
April 2010 will see a restriction in the personal allowance for those earning £100,000 or above. Those on £150,000 and over will receive no personal allowance at all.

National Insurance to go up
There is a small tax rise hidden in this year’s budget - employer and employee contributions are to go up 0.5 pence. Effectively the top rate for tax and NI will now be 46.5%.

Corporation tax changes

The planned increase in the small company rate from 21% to 22% has been delayed until 1 April 2010. This was previously to take effect from 1 April 2009.

If you require assistance with any adjustments relating to these changes, please get in touch with us.