On 1st January 2010 VAT will return to its pre-2009 level of 17.5% but what does this mean for your spending and how can you soften the blow?
Without going into technicalities VAT (Value Added Tax) is a tax that is applied to the vast majority of goods and services that you buy and pay for. This includes things like fuel and clothes as well as services like your broadband supply and mobile phone; it's even applied to the cost when you call out a plumber. There are a few exceptions such as food and children's clothing but by and large VAT is charged on most things that you spend money on.
On 1st December 2008 the Chancellor, Alistair Darling, cut VAT by 2.5% in an attempt to boost both consumer spending and an ailing economy. So, for the past year we have, in theory at least, paid 2.5% less for the purchases we have made and the services we have used. Unfortunately however, the cut was only temporary and on the 1st January 2010, it's being returned to its pre-cut level.
VAT is generally included within the 'for sale' price of something we pay for so it's never usually necessary to give it any consideration. However, now VAT is being upped from its current rate of 15% to 17.5% it's worth paying it a little attention.
How much will prices increase?
VAT is currently applied at a rate of 15%, this will increase by 2.5% to 17.5% on 1st January, 2010. This 2.5% increase roughly equates to a 2p increase per £1. To work out how much something will cost post VAT increase you'll need to multiple its current price by 0.025%.
Will all retailers pass on the increase?
Eventually all retailers and service providers will increase their prices to account for the 2.5% rise. However, it is not compulsory that they do this on January 1st. As such some may delay it until later in the year.
What if I've ordered something I'll receive in January?
The rate at which you'll pay VAT is generally determined when the VAT receipt for the transaction is raised. This is usually done when you pay for something so, if you have placed an order for goods or services that you'll receive in January (or sometime thereafter) it's likely that you'll pay VAT at a rate of 17.5%
What if I've paid a deposit for something I'll receive in January?
If you've paid a deposit for something that you'll receive and settle the balance for in 2010 it's likely that you'll pay VAT at a rate of 15% on the deposit and 17.5% on the rest. This is because the VAT receipt is likely to be raised when you settle the balance. As such, if it's a big spend then ask the retailer or service provider to raise the VAT receipt before 1st January so that you benefit from the 2.5% saving.
Bear in mind though that this will only be possible if you will then receive the goods or services in the near future and you can settle in full within 6 months, otherwise you'll be eligible to pay the extra 2.5%
What if I've paid for something I'll receive in January?
If you've already paid in full for goods or a service that you'll receive in January it's likely that you'll have paid at a rate of 15%. This will apply to almost any purchase you make before the end of December so it can pay to go January sale shopping early and get any big purchases ordered, and paid for before then.
