The impending VAT increase was one of the most controversial elements of the coalition government’s first Budget announcement.
The headline rate of VAT will increase to 20 per cent from 4 January 2011. This will have a range of important implications for businesses of every size.
January might seem like a long way away – but it is important to plan ahead if you are to be prepared for the increase. So how can you mitigate the impact of the VAT rise on your business?
1. Think about pricing
Perhaps the most important concern facing VAT-registered businesses is that of pricing. As a retailer or service provider, you need to decide whether you are going to pass the VAT increase on to your customers or clients – or absorb it yourself.
This can be a more complex decision than it initially appears, but it is broadly dependent on whether or not your customers and clients are likely to use price as a major differentiator when comparing you with your competitors. If you are providing something that no-one else can offer, or if you use other selling points like excellent after-sales care to differentiate yourself, then absorbing the increase may not be necessary. But if you are competing solely on price you will need to think carefully about whether or not passing on the increase is a sensible idea.
2. Talk to your staff
It is important that your staff are kept up to date with changes to your pricing. Make sure that they understand any impending changes – as they will likely be the ones that have to deal with altered prices ‘on the ground’.
If you think customers may comment on or query the increased prices, provide your staff with a few sentences they can use to explain the hike. Simply explaining that it is the government’s decision, rather than yours, can help to persuade a customer to make a purchase at the higher price.
3. Review supplier contracts
Of course, the VAT increase will also be affecting your suppliers. You may well see your overheads increase as a result of the hike. Indeed, this may be a deciding factor in determining whether or not you pass on the increase.
It is also worth noting that increased overheads may cause some businesses that are not already registered for VAT to consider registration. If you are not already registered but make a large volume of VAT-liable purchases, you should consider whether the rate increase makes registration a more attractive option.
4. Get your accounting right
Any rate increase means potential accounting and record-keeping difficulties. Despite the problems that businesses will encounter, HM Revenue and Customs seems unlikely to give any leeway to those firms that fail to keep their accounts up properly.
Problems often arise when credit notes are given before a VAT increase, but redeemed afterwards. You should make sure that you seek advice from your accountant to help you deal with problems of this sort.
5. Concentrate on marketing
Come January the VAT rise will, understandably, be big news. You can use this to your advantage with some clever marketing.
If you are planning to absorb the increase, rather than pass it onto customers, you should make this a prominent feature in your marketing efforts. Even if you plan to pass it on, you might still consider running a campaign encouraging potential customers to ‘grab a pre-VAT increase bargain’ in the weeks before the rate goes up.
6. Prepare for a pre-hike surge…
There is traditionally a rush amongst consumers to take advantage of ‘bargains’ immediately before a VAT increase. Consider the jump in sales the day before the rate returned to 17.5 per cent last year, for example. It is highly likely that this phenomenon will be repeated this time around, and you should make sure that you are prepared for it. This is particularly important for retailers of big-ticket items.
7. …and a post-hike lull
The corollary of this is that retailers should expect sales to suffer immediately after the VAT increase. Opinion differs on how long this impact will last; some doomsayers expect to see sales collapse as a result of the increase, but this seems somewhat unrealistic.
Either way, you should make sure that you factor the potential for a post-hike lull into your cashflow forecasts – particularly if you work in retail.
The impending VAT rise will force many businesses to take some important financial decisions. But, by thinking ahead, you can minimise the damage to your firm - and even profit from the change.