KPMG has suggested three VAT options for Chancellor Alistair Darling to take into account when reviewing this year’s Budget.

The market watcher has stressed how there is an urgent need to kick start a recovery process through supporting business and consumers.

With that in mind, KPMG has suggest the temporary removal of the Payment of Account regime, to waive the default surcharge for late VAT payments arising out of the credit crunch problems. It suggests charging interest instead and the adoption of EU legislation to allow reduced VAT rates on labour-intensive services.

KPMG claims that by temporarily removing the Payment on Account regime it would allow struggling businesses some very welcome breathing space.

At present, large VAT payers with an annual liability in excess of £2m have to pay 1/24th of their estimated annual liability to HMRC in the second and third months of the VAT quarter, and a balancing payment has to be submitted with return by the end of the quarter.

Amanda Tickel, tax partner at KPMG, said: “Having to make these up-front VAT payments increases the pressure for larger companies trying to manage cash, compared with smaller businesses that are allowed to pay VAT quarterly in arrears.”

Having suggested that the government waive the default surcharge for late VAT payments arising out of the credit crunch problems and charge interest instead, KMPG believes HMRC should allow businesses to pay a reasonable interest rate on late VAT until they receive payment.

Default charges currently stand at a flat 2, 5, 10 or 15 per cent of the late VAT, depending on how many late payments have been made.

The organisation is also pushing for the adoption of EU legislation to allow reduced VAT rates on labour-intensive services.

According to KPMG, the 2.5 per cent standard VAT rate cut announced last year proved to be a costly initiative and had little effect on stimulating retail demand. KMPG thinks it is unlikely the general rate cut will be revisited in the upcoming Budget.

Presently, 27 EU Member States agree there should be an option for governments to apply a reduced VAT rate of 5 per cent to certain labour-intensive services, including the supply of restaurant and catering services (not alcohol), work on private homes, hairdressing and window cleaning. Despite the UK welcoming this agreement, the changes are yet to be adopted.

Tickel added: “Such a sizeable VAT cut for labour-intensive sectors could significantly shore up business margins and support employment in these sectors.

“If the UK does decide to implement reduced rates, following recent EU-wide agreement on this issue, changes would provide a particular boost to pubs, restaurants and builders.”

With UK VAT rates currently at 15 per cent, and due to increase to 17.5 per cent at the end of the year, KMPG believes that introducing a reduction of 5 per cent would equate to lower VAT bills for these sectors.