Motor - Preparing for a VAT rate cut

Motor, Advisory, VAT

As you have probably heard there are strong rumours that the Chancellor, Rishi Sunak is contemplating a temporary VAT rate cut as one of the measures to stimulate the economy post coronavirus. He intends to make an announcement about a variety of measures on July 9th. The danger of allowing rumours of a VAT reduction to gain traction is that this can cause buyers to defer purchasing expensive items such as cars. We therefore expect July 9th to include something definitive about VAT, including the possibility of a general or targeted reduction in the rate at relatively short notice.  

Given the importance to the economy of the motor sector, it would be extraordinary if the chancellor excluded cars from any VAT reduction and we therefore recommend advance planning for either a general rate change (rumoured to be 17%) and/or a reduction targeted at promoting EVs.

The last VAT rate cut back in 2008 was bought in very quickly and caused major implementation issues for all types of businesses. It should be noted that this was the first time a VAT rate cut was used as part of a fiscal stimulus solution and if you have experience of this last time round you will agree that being prepared will be important for an easier implementation. 

We have set out below a brief checklist to assist with preparation. One significant simplification which is especially relevant to the sector is the treatment of deposits taken before a rate change – you can choose to use the lower rate if the sale takes place after the change. This option to use the basic tax point is going to be really valuable and important, because it will enable deposits to be taken in the knowledge that the new VAT rate will apply to the whole supply as long as the car is delivered after the rate reduction. We can advise further on the practical implementation of this.

VAT rate change checklist:
  • Software changes. Can you do this in-house and set up new tax codes or do you need a software provider upgrade? Contact them now and get project management time booked in.
  • Prepare in-house invoice templates so that changes can be made to allow a new VAT rate to be charged. This can take up more time than is expected and internal resources will be needed to implement this.
  • Book marketing campaigns to coincide with VAT rate cut. Do you have post Coronavirus campaigns in the pipeline and bear this potential change in mind.
  • If your business enters into finance agreements, where VAT on monthly payments is set out in advance, you will need to take action to deal with payments due within the VAT rate change period. 
  • For price tags already on items – stickers are a quick fix to match the item or a VAT discount can be offered at the point of sale at the till.
  • Payments on account.  The reduced rate of VAT may take you under the POA threshold of £2.3m or reduce the amount of the payments on account that need to be made.  In either case, it is necessary to write to HMRC to request either removal from POA or a reduction in POA payments.
  • Cash-flow impact.  If you are collecting less VAT from your customers as a result of a reduction in the VAT rate, this could potentially have an adverse cash flow impact for your business particularly where you need to fund VAT payments relating to periods prior to the reduced rate applying.  It is important to model the cash flow position to allow you to plan accordingly.
  • Anti-forestalling measures.  Typically the government introduces measures that come into play when a temporary VAT rate reduction comes to an end.  These are generally aimed at preventing artificial arrangements that create a tax point arising while the reduced rate is in place where the supply is made after the rate reduction ends.  Keep yourself informed or any such measures to assess the impact that these could have based on your normal business model and trading patterns.  
  • Plan stock levels and delivery times well in advance of any announced end to a temporary VAT rate cut.

A reduction in the VAT rate will benefit hotel operators and tourist attractions in the UK, hopefully encouraging travelers to holiday at home. Tour operators offering holidays in the UK will find their costs decrease. As VAT is paid on the margin, then the tour operator’s VAT bill, assuming the saving on costs is passed on to the traveler, will likewise decrease. 

Download a copy of our information sheet or contact a member of the specialist Indirect Tax Team:

Steve Freeman 
+44 (0)7795 476 651  

Glyn Edwards
+44 (0)7889 537549

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Motor, Advisory, VAT