The Dutch government recently resigned after failed budget negotiations. Less than four days later, a partnership of five political parties (that jointly have a majority in parliament) agreed on a new austerity package.
One of the main points of the budget is an 2% increase of the VAT rate: from 19% to 21%. This will create additional tax revenue of 4 billion Euro as early as next year (2013). On the flip-side, personal income tax rates, particularly for lower income groups, will see a mild decrease.
The Netherlands had recently transferred art and theater from the lower VAT rate to the standard VAT rate. See my blog entry here. This move will be undone, and art will be back where it belongs, at the lower VAT rate (still 6%).
We have seen substitution of income tax for VAT throughout Europe and beyond, and this is likely to continue. Also, this process has been recommended by both the IMF and the OECD as an element of the ‘road to a balanced budget’.
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In an earlier blog post (see http://www.us-vat.com/blog/?p=185), I highlighted some of the practical business challenges that come with a VAT rate change. These include:
Accounts receivable, billing, customer management
At first glance, a change in VAT rate seems to be an easy update of the accounts payable or billing functionality of your accounting system. The truth is, however, that the impact is much broader – I blogged about that here, with a reference to a sobering Accountancy Age article. Yes, the rate changes impacts your billing system, and you should be aware of the various and sometimes differing transition rules that each country has implemented (the UK guidance is here). You must pay particular attention to pre-payments, late payments and ongoing services / work in progress invoices and ensure the correct VAT rate is used.
Rate changes are not optional – I sometimes hear companies say that VAT does not matter in a business-to-business scenario. VAT rates, and paradoxically the zero-rate, are the “low hanging fruits” of a VAT audit and must be implemented correctly, as should any invoice requirement. Electronic invoices sometimes fly under the radar, and you should make sure to include these in your updates.
Accounts payable / purchasing / vendor management
Accounts payable requires exactly the same attention as accounts receivable. The risk of missing out on input VAT is real, because incorrect VAT invoices generally need to be corrected before input VAT can be claimed. In other words, you should review your vendor’s invoices to make sure that the correct rate has been used.
I should also mention that reverse charges are not by definition always creditable or recoverable. If you purchase goods or services to provide exempt supplies, the purchase VAT or reverse charge is not recoverable and will be a cost. Exempt supplies include certain financial, medical and educational services. A VAT rate increase therefore translates into additional cost for companies that provide such exempt supplies!
I sometimes review contracts that contain language such as “VAT at the rate of 17.5% must be added to all amounts mentioned in this agreement”. I would suggest to the legal department that these contracts be changed to reflect something along the lines of “VAT at the applicable rate must be added to all amounts mentioned in this agreement”.
If you are interested (and if you read Dutch) – de concept overeenkomst is in de pdf hieronder: