Research carried out by the ICAEW shows that businesses are split over how best to deal with the rise in the standard rate of VAT from 17.5% to 20% in January 2011.
Like many other groups, the accountancy organisation is urging companies to start preparing for the VAT hike before the Christmas rush.
According to an ICAEW poll, businesses are split about how they will deal with the increase in VAT. 6 in 10 businesses believe that the VAT hike will affect their organisation’s cashflow to some extent. Nearly one tenth (9%) think cash flow will be affected to a significant degree.
Over a third of businesses polled are likely to absorb the costs within the business (36%), under a third expect to increase their prices (30%) and the remaining third (34%) plan to do both (absorb some costs and increase some prices). Furthermore, the continued changes to the rate of VAT over the last two years has meant that a third of businesses (33%) now find it the most burdensome administrative task in terms of time spent compared to payroll (50%) and corporation tax (12%).
VAT rise – things to bear in mind
The change only applies to the standard VAT rate. There are no changes to sales that are zero-rated or where VAT is charged at the reduced-rate. Similarly, there are no changes to the VAT exemptions.
The ICAEWhas also reminded businesses:
- If there is an overlap of goods and/or services around 4 January 2011, the VAT charge can be split on a fair and reasonable basis so that 17.5% tax is charged on the value of supplies before 4 January 2010 and 20% on work carried out after this date.
- Don’t forget that any credit note or refund given to a customer is based on the same rate of VAT that was charged on the original sale. The same principle applied to VAT claimed on bad debts.
- If you are a non-VAT registered business considering making a capital investment, you may want to bring it forward to benefit from the cheaper rate. Consumers considering major purchases such as a new car should also think about doing so before 4 January 2011. Always check supplier terms carefully and make sure that any VAT savings made by advancing purchases are not offset by higher costs.
- Remember that HMRC are likely to be less lenient than with previous VAT changes as companies are more used to the changes and there has been sufficient notice given. Penalties and interest could be charged by HMRC if mistakes are made.
- Start preparing as much as possible for the rate charge. Are the relevant employees in accounts going to be available at the beginning of January to sort out queries? Are there any supplies that will cross over the two rate period?
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