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VAT rise to reduce income for 180,000 UK firms

Despite assurances that no business in the UK would suffer when the government announced the reduction in VAT from 17.5% to 15%, it appears a number of businesses who are part of the flat rate scheme would see their income reduced. In simple terms larger companies add 17.5% to the cost of their goods and then reclaim this from the government through the business expenditure option. However this is slightly different for smaller firms who are allowed to opt out of reclaiming the VAT.

Under the old flat rate terms, a business which charges 17.5% VAT was required to pass on 11% to the revenue and retain 6.5% as their share. However, under the new changes as of Monday they would be obliged to send 9.5% of the VAT charged to the revenue and retain just 5.5% for themselves thereby seeing a reduction in their income. Whether this is an anomaly which the government has overlooked or a calculated approach to reducing the VAT burden remains to be seen.

The government has already made a number of changes to the pre-budget report after it appeared that claims made in the House of Commons were not bearing fruit in the real world. The reduction in the whiskey duty came as a consequence of the fact that changes to the VAT law would actually have increased the cost of a bottle by up to 29p due to the increase in underlying duty.

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