VAT increases could hit the Welsh economy harder than elsewhere in the UK

Any post-election increases in the rate of VAT could have an impact on the Welsh economy that is disproportionate to other parts of the UK, a leading Welsh firm of chartered accountants has warned.

Justin Crowley, Audit Director at Broomfield & Alexander, said that under existing rules, many public sector and not-for-profit organisations providing VAT exempt supplies services such as education, health and welfare and social housing, might not be able to pass on VAT in full to end consumers in the way that private companies could.

He argued that with the Welsh economy being more dependent on these sectors than other parts of the UK, public and third sector bodies could find themselves struggling with the double whammy of absorbing additional indirect tax costs while at the same time trying to implement Government-imposed budget cuts – with consequent impacts on jobs and the wider economy.

Speculation around increases in the standard rate of VAT has been mounting over the past few weeks following the election outcome, although the new Government has yet to reveal its plans.

“During 2009, we witnessed how the standard rate of VAT could be manipulated to help to achieve macro-economic aims,” said Mr Crowley. “This form of indirect taxation is a powerful revenue-generating tool for any treasury, and revenue generation is the flip-side of the present coalition Government’s requirement to deliver public spending savings and reduce the budget deficit.

“Welsh SMEs might not see a direct impact upon their cost base because they simply pass on the VAT costs to the end consumer. But they still need to think very carefully about the impact of end-price increase on demand for their goods, as the amount consumers buy, and even whether they buy at all, is heavily influenced by price.

“But for Wales, VAT increases could mean double trouble. With the high proportion of our workforce employed in the public and not-for-profit sectors compared to certain other parts of the UK, it is quite possible that the impact here could be similarly disproportionate.

“All organisations which feel that they could be hit in this way would be advised to try to model the impact of increases at an early stage and take any steps that they can to mitigate the extra cost – for example, bringing forward effective supply dates to a date prior to the effective date of the increase, if indeed such an increase is announced within the emergency budget set for 22nd June.”

Mr Crowley also warned that none of the forms of UK taxation could be viewed in isolation.

“Even those organisations able to pass on the impact of increases in VAT need to be aware that increasing indirect taxes has the effect of inflating prices,” he said.

“Price inflation, whether caused by increases in the net cost of goods and services or the increase in indirect taxes added, is very often followed by wage inflation. Again, forecasting the effects of all of these factors is crucial to maintaining effective financial control.”