The inevitable VAT rise to 20%?

The Times this week reported that no matter which of the main parties wins the next General Election, and presuming that it isn’t the Lib Dems, we will see VAT jump to 20%. The paper reports that the move would generate an extra £13 billion for government coffers.

If the reports are true, it will mean that VAT will have jumped enormously this year. The rate only reverted to 17.5% from 15% on 1 January this year. There is clearly an enormous black hole in the public finances which needs filling and the VAT hike will go some way (although by no means all the way) to fill it.

The hike will worry travel buyers who are already concerned that they may have to pick up the VAT element on hotel billback transactions. The entry into force of the EU VAT Directive on 1 January seemed to indicate that TMCs would not be able to reclaim the VAT element of billbacks and instead would have to pass it on to the client. Buyers were inevitably nervous about the prospect of an additional 17.5% on top of their hotel bills. An extra 20% would be even harder to bear.

Whether buyers will have to pick up this charge is still uncertain. The legislation itself seems clear – that the VAT cannot be reclaimed (see http://www.hmrc.gov.uk/briefs/vat/brief7409.htm) – but there may yet have to be a test case on whether that is what HM Revenue and Customs will do in practice. Lawyers wanting to challenge the interpretation of the rule may choose to look at whether business travel agents should come under the definition of tour operators and whether billed back hotels really constitute part of a package.

Either way, it looks like we will all have higher VAT bills come the summer.