anyspacedirect news

How should my business deal with the VAT rise?

11th January 2011
On January 4th, the Government raised VAT by 2.5% to 20% in order to increase tax take and help reduce the country’s significant budget deficit. This caused concern amongst businesses who were already likely to be negatively affected by the Government’s Comprehensive Spending Review. Small and medium sized firms in particular may find the VAT rise has serious effects on profitability.

Firms were advised in December to prepare effectively for the rise due to its pervasive nature and potential to cause significant operational change. If your firm has not taken action yet, it is essential to do so as soon as possible, and to do so in the most financially sustainable way.

In December, when many smaller companies were deciding what measures to take, a clear divide emerged between those who wanted to absorb the costs of the VAT rise and those who wanted to increase costs to customers.

The right path for your company will decide on a number of issues including customer loyalty, the administrative costs of increasing prices and whether profit margins are large enough to absorb the increased costs efficiently. Talking to a professional accountant is the best choice as they will be able to advise you further. Some companies may find that a combination of both routes will yield the best result.

Here are two useful tips to help you prepare more efficiently for the VAT rise:

Ensure your goods are not covered by another VAT rate

Some goods and services are not covered by the standard VAT rate. Zero-rated goods are those that are taxable but are subject to a VAT rate of 0%, and include foodstuffs and children’s clothing. Reduced-rated goods, such as domestic fuel and children’s car seats, are charged at a different rate to the standard figure. Exempt goods, which include financial services, are not taxable and are not subject to any VAT rate.

Ensure your accounting system is capable of handling the change

Newer electronic accounting systems will be much easier to work with than older systems because the VAT increase will be more easily applied throughout your business systems. Ensure you gain professional help with your accounting system if unsure as all invoices and documents must reflect the new VAT rate.
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