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The VAT “lock” already unpicked?

In today's Budget, the Chancellor had very little to say on VAT but reiterated the election promise to keep the VAT rates “locked”.  In the Summer Budget guidance it was announced that legislation will be introduced to “lock” the VAT rates for this Parliament such that:

  • The standard rate cannot exceed 20%;
  • The reduced rate cannot exceed 5%; and
  • Supplies that are subject to the 5% and 0% (zero) rate will not be removed from these beneficial rates (under the powers set down in the VAT Act permitting the Treasury to do so).

However, this latter point already conflicts with the European VAT Court (CJEU) decision on 4 June 2015 that the UK’s reduced rate for energy saving materials goes too far and has to be curtailed.

It is important to remember that whilst politically attractive, legislating a “freeze” on the UK VAT rules is not entirely effective as the UK is subject to EU VAT Law and developing EU VAT Court (CJEU) decisions.  Another recent example of this process in action is the 2015 European VAT Court (CJEU) decision in ‘go fair’ Zeitarbeit OHG v Finanzamt Hamburg-Altona, which throws the UK’s Nursing Agencies Concession in doubt.  Currently, UK agency supplies of nursing staff can benefit from VAT exemption, but this may need to change to become standard rated.

Interestingly, the Budget’s proposed “locking” legislation does not mention any restrictions on VAT “exempt” supplies, so will not affect taxable supplies becoming exempt or more worryingly, exempt supplies becoming taxable.



Date: 8th July, 2015
Author: Richard Collier


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