£45m VAT blow to Scots finance firms

Published on Saturday 5 December 2009 13:13

SCOTLAND'S struggling financial services sector will be dealt another blow – costing millions – when the VAT rate goes back up to 17.5 per cent following a temporary cut.

In last year's pre-budget report (PBR) Chancellor Alistair Darling unveiled the reduction to 15 per cent to encourage consumers to keep spending to give the economy a boost during the recession. Unless he announces otherwise during Wednesday's PBR, the increase will be effective from 1 January.

Directors at accountancy firm Deloitte have calculated that the cost to the Scottish financial services sector of the 2.5 percentage point jump will be at least 45 million. There is also speculation that Darling will announce a further increase in the rate to 20 per cent to become effective next year or in early 2011 in a bid to raise billions of revenue to reduce the UK's colossal public debt.

Unlike other businesses, many companies in the financial services sector cannot recover a substantial portion of VAT incurred. Any increase in the VAT rate will increase the cost base of financial services groups. This will reduce profitability for companies unless the extra costs are passed on to customers, making borrowing, saving and investment products more expensive. This would impact the incentive for the population to save and the ability of customers to borrow.

Murray Mclaren, director in Deloitte's tax team, said: "When financial services groups buy goods and services that attracts VAT. Unlike retailers, for example, they can't recover that VAT.

"In the grand scheme of things 45m across the entire sector may not sound a great deal, but at a time when the sector is looking for recovery it's not helpful."

Bryan Flint, also a tax director at Deloitte, described VAT as "almost an invisible cost" for financial services companies as most customers are not aware of its existence. "Customers don't see it on their bank statements or on services they are receiving. The cost is sticking with the provider which has to deal with any increases. Organisations need to make the decision of whether to pass the cost on to customers. It's not as simple as for a retailer where the amount is clearly appearing on the sales receipt," he said.

Flint added that the cost had always been there, but the issue arises when it is increased in times of difficulty. There are constraints on what the UK government can do to intervene as VAT is a European Union-wide tax. He said there were studies looking into the issue of VAT on financial services, but it was a difficult area to tackle.

The threat on VAT increases comes at a time when the entire Scottish financial services sector is struggling to recover from the downturn. Last month, the Ernst & Young ITEM club of economists revealed that the country's financial services sector had been the biggest under-performer in the recession.

In the year to June output in the sector shrank by 8.4 per cent, ten times more than the wider UK.