With VAT rising today to 20% we’re urging businesses not to bury their heads in the sand. Whilst the 2.5% hike can make for a difficult start to the New Year,  if businesses assess the impact and act accordingly it will be possible to manage the rise as effectively as possible and minimise the risk of errors arising.

Be prepared, seek clarification if you are unsure on how to treat an item for VAT purposes, and you never know you may actually profit from the rise.”

Here’s our 12-point survival plan:- 

1. Be aware of the tax point rules and make sure that you have a company policy that your staff know and understand.  Because each business is unique, it is neither necessary nor appropriate for all businesses to have identical policies relating to the VAT rate increase.  It is, however, essential that any policy adopted fits within the scope of the tax point rules as well as the anti-forestalling legislation.   

2. Think about pricing – will you pass the VAT increase onto customers or absorb this cost to keep prices the same, remembering that you will still have to pay over the additional 2.5% to HMRC. This will be a commercial decision based on what competitors are doing, whether suppliers are increasing their prices and elasticity of customer demand.

3. As the vast majority of people will be aware of the VAT rise, a  marketing push could encourage customers to make purchases.  Holding any prices as they are could provide a competitive edge especially if you can boost margins on other lines to compensate.

4. Don’t forget if you are a business only selling standard rated goods, one-sixth of your revenue will be VAT.

5. One of the great traditions of Christmas shopping is the return of unwanted presents in the New Year, so retailers should make sure they understand the rate to put on credit notes, the value of gift vouchers to give in return and the value of exchanged goods.

6. Retailers should ensure their POS systems can identify goods bought before the rise so that any later refunds reference the rate that was applied for the original supply. 

7. Get your accounting right to avoid any fines from the tax man. HMRC will as ever penalise mistakes such as a wrongful declaration of output tax so don’t expect leniency. Careless errors could trigger a 30% penalty.

8. If you are not registered for VAT and sell mainly zero rated products, the rise is a good prompt to register as you will be able to recover the VAT you incur on suppliers’ costs and so reduce overheads.

9. Charities and VAT-exempt businesses, which are unable to recover VAT costs on purchases, will be hit the hardest.  Be aware that your budgets will have 2.5% less to work with in 2011 than you did in 2010.

10. Take a look at supplier terms and don’t be fooled by ‘Beat the VAT Increase’ promotions.  Unless cash-flow is extremely tight or VAT is irrecoverable it will take a £1,000 spend to incur an additional £25 cost as a result of the VAT rate increase.  However, for larger businesses, payments on account will be based on pre-VAT rate rise quarterly liabilities which will give some relief from the effect of the rise.

11. Businesses on the flat rate scheme should take the opportunity to review their position. Revised flat rate scheme rates will become effective at the time of the rise so take advice to establish if there is the chance to use a lower banding. This could have a considerable impact on cashflow.

12. Pay particular attention if you or your clients import. Import VAT deferment levels should be reviewed. SIVA (Simplified Import VAT Accounting) could be a good option but make sure you take further advice on this. 

Ultimately our advice would be to be prepared, seek clarification if you are unsure on how to treat an item for VAT purposes, and you never know you may actually profit from the rise.

For further advice or information get in touch with us: vat@thevatconsultancy.com