Big Four firm backs 5% VAT rate

A ‘radical and targeted approach’ to VAT is needed in next week’s Budget, according to KPMG, which has backed a significant reduction to the tax for some areas of business.

The Big Four company said that there are a number of options open to the Chancellor ‘that could help both consumers and businesses to see those promised green shoots of [economic] recovery’.

Foremost among them is the adoption of 5% VAT rate for the supply of labour-intensive goods and services.

EU member states are currently allowed – on an experimental basis until 2010 – to apply lower rates on certain labour-intensive goods and services – and MEPs recently voted in support of extending the scope of the measure to include locally supplied services such as beauty treatments, restaurants and domestic care.

It is unlikely that the 2.5% cut to the general rate of VAT – launched last December - will be revisited in the Budget, said KMPG, but a 5% rate for some sectors ‘would equate to substantially lower VAT bills’.

Tax partner Amanda Tickel remarked that such a move ‘could significantly shore up business margins and support employment in these sectors.

‘Restaurants and pubs are feeling the squeeze from reduced consumer spending. A significant VAT reduction would legally give them two options: hand part or all of the reduction on to consumers to help drive demand through reduced prices, or use the tax saving to support margins and stave off other cost-cutting measures, like redundancies.

‘Builders would also benefit if the Government were to widen the existing reduced rate reliefs for work on empty houses and apply it to housing repairs and renovations. This would have a real impact on costs incurred by home owners, and could stimulate demand for builders and those in related trades,’ added Ms Tickel.

She also suggested that Alistair Darling temporarily remove the payment-on-account VAT regime for larger concerns, in an effort to provide struggling businesses with ‘some very welcome breathing space’.

And, finally, Ms Tickel’s firm called for the waiving of the default surcharge for late VAT payments, if they are a consequence of ‘credit crunch problems’. A ‘reasonable’ interest should be charged instead, recommended KPMG.

Categories: News , Budget 2009 , Admin , VAT