VAT ANOMALY IN THE EMBROIDERED CLOTHING INDUSTRY

There are many business’s both large and small that have fallen foul of unclear VAT rules.

Today a court case ruled that smoothie manufacturer, Innocent, must pay VAT on its products following a legal challenge by the business. This well known smoothie brand had argued that because its product is made entirely of fresh fruit, which along with many food products presently does not attract VAT, then neither should they. The court judgement decided that the due to process of turning the fruit into a drink, it did ADD VALUE to the product and should therefore be subject to VAT.

There are many other VAT anomalies, mainly within in the food industry over which arguments and court cases have taken place. One example was Jaffa Cakes. Since cakes do not attract VAT but biscuits do, McVities, the makers argued that the Jaffa Cake was indeed that, a cake and not a biscuit. An argument they duly won. Not so successful were Proctor and Gamble the makers of Pringle crisps. They had argued that as both chips and jacket potatoes were not subject to VAT even though they had been processed to a greater or lesser degree from the humble potato then neither should the crisp. This was not upheld and Proctor and Gamble lost their case and the Pringle crisp sold in almost every supermarket in the country is more expensive as a result.

So how is the embroidered clothing industry affected by VAT rules and regulations? One area that has been debated over recent years is whether, or not embroidered children’s clothing should be VAT exempt. All children’s clothing does not attract VAT but what happens when that item of clothing is decorated using embroidery. Does this add value to the product? Most would say it does, but it still remains an item of children’s clothing.

JKL Clothing have continued to adhere to the VAT rules and regulations as they see them by separating any invoice for embroidered children’s clothing, charging the clothing item at zero rate VAT and itemising a separate charge for the embroidery, making that item of the invoice subject to the normal VAT rate, currently 17.5%.

Jeff Harris, JKL Clothing MD, comments, “We feel that the law regarding VAT and embroidered children’s clothing remains unclear and until it is challenged and a definitive judgement made we will air on the side of caution and make all embroidery whether onto children’s clothing or not subject to the appropriate level of VAT”

How will the VAT rise affect the Workwear industry

We have all known for some time that the new coalition government will be raising the standard rate of VAT from the current 17.5% to 20% as of the 4th January 2011. This will bring the UK in line with other European countries (France 19.6% and Italy 20%).

How this will affect the workwear industry is something that has sparked serious debate amongst manufacturers and suppliers alike.
There are broadly three trains of thought on this matter and three plans of action aimed at adapting business to the forthcoming rate rise.

Many workwear business's aim to swallow the rate rise themselves and maintain current levels of profitability by increasing sales through a variety a marketing and sales campaigns.

Others believe that because the VAT rise will affect all business's nationally, this will therefore have little affect on sales and therefore they will maintain their market position and consequently retain the same or similar levels of profitability.

The third train of thought strikes a note of caution to all business owners, in that should companies not pass on the rate rise to customers by raising prices for fear of offending customers, by in some cases only a few pence, this will create an unsustainable business. The business may well survive for the first year but slowly this policy will mean that the rate rise will continue to chip away at profits and ultimately lead to an unprofitable and unsustainable business.

So which path will JKL Clothing tread. As always we are constantly monitoring the Workwear market place to ensure we remain competitive. We must however ensure that JKL Clothing as a company continue to survive and indeed grow. This may mean that we are forced to pass on the governments decision to raise the rate of VAT to our customers. We have however adopted a fourth strategy prior to having to do this. JKL Clothing have approached all its suppliers and attempted to negotiate a more competitive price from them. We have been able to do this due to the steady growth we have seen during the past 18 months. This has lead to increased spend with our suppliers and therefore a strengthened bargaining position when we come discuss the price we pay for our workwear garments from them.

JKL Clothing will certainly be doing all it can to ensure they are around for many years to come.