In April 2014, VAT will increase by three percentage points to 8%. It will be the first VAT increase in 17 years.
The government hopes the reform will secure revenue to fund the increased cost of social security.
The main expense for companies will be an increase in non-creditable input JCT. The reform, which will see VAT increased again to 10% on October 1 2015, may also lead to a multi-rate VAT system.
“When the 10% rate comes in, the government may introduce multiple JCT rates for food or daily necessaries,” said Chikara Okada of Deloitte. “Therefore, systems including sales, purchase, fixed assets, and accounting related to calculation of JCT must correspond to the new JCT rate.”
Multiple VAT rates and exemptions serve to protect poorer consumers from price rises on essential items, but companies worry it increases complexity in the tax system and leads to larger compliance costs.
The VAT rise may also increase complexity for consumers.
“Since 2004, companies which trade with consumers must show a JCT inclusive price to the consumers,” said Okada. “However, due to the recent change of JCT rate, the government allows such companies to show JCT exclusive price to the consumers with certain requirements. Many retailers consider which method (JCT inclusive, or JCT exclusive) they should elect and at what level they should set their selling price. Consequently, consumers may be confused by the JCT inclusive price and JCT exclusive price shown in the market.”
Nevertheless, companies are generally supportive of the reform on the basis that a tax hike is necessary to fund rising social security costs and a VAT rise is less costly to them than a corporation tax increase.
