Industry comment, updates and news from the Websters team.

Effect of VAT ‘normalising’ on service charges

Wednesday, October 28th, 2009 in Commercial, Landlord, News, Residential, Service Charge

The short term reduction of the standard rate of VAT, from 17.5% to 15%, introduced from 1 December 2008 in a bid to help alleviate the effects of the recession is due to come to an end at 31 December 2009.

The rate will then return to 17.5%, unless the Government decides that the economy still requires the added stimulus that this reduction was designed to provide and extends the period beyond that date.

Our experience shows that when the rate was reduced some suppliers passed on the benefit of the reduced VAT rate, as the Government had intended, by keeping their net costs unchanged, resulting in a reduction in the gross cost. Other suppliers kept their gross costs unchanged, effectively taking advantage of a “hidden” increase in their net charges.

Presumably, when the VAT rate returns to 17.5%, the gross cost for the former group will simply return to the previous level, whilst the latter group will retain the increased net cost and apply the higher rate of VAT.

In terms of service charge situations the overall effect on a service costing £1,000 plus VAT prior to 1 December 2008 can be summarised as follows :-

Residential service charges Commercial service charges
Option to tax No option to tax
Prior to 1 December 2008 £1,175.00 £1,000.00 £1,175.00
Rate reduced to 15% :
1.) Net cost unchanged £1,150.00 £1,000.00 £1,150.00
2.) Gross cost unchanged £1,175.00 £1,021.74 £1,175.00
Rate increased to 17.5% :
1.) Net cost unchanged when rate reduced £1,175.00 £1,000.00 £1,175.00
2.) Gross cost unchanged when rate reduced £1,200.54 £1,021.74 £1,200.54
Assumes no inflationary increase in the cost of the service during the period.

Therefore, for residential tenants and tenants of commercial non-opted buildings there has been a short-term benefit of lower costs from those suppliers who “played fair” and passed on the benefit of the VAT rate cut, offset by a disadvantage of a higher cost base going forward from January 2010 for those suppliers who took advantage of a hidden price increase.

Watch out for your next service charge statement.

For commercial tenants of opted buildings there is no up-side from suppliers who passed on the benefit of the VAT reduction (other than in cash flow terms), only higher costs going forward from 1 December 2008 for those suppliers who took advantage of a hidden price increase.”

Alternatively, you could just use the first paragraph as a bald statement of fact if you think that my subsequent comments are a bit too cynical!

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