Planning for the VAT rise - act now

The VAT rise is looming. On 4 January 2011 the headline VAT rate will increase to 20 per cent, as announced in the coalition government’s June Budget.

The increase has a range of important implications for your business – regardless of whether or not it is VAT registered. You should plan for the VAT rise now in order to ensure compliance, and to minimise the impact on your bottom line.

1. Understand the impact

To begin with, you should make sure that you understand the impact of the VAT increase on your business. The way in which the rise affects you will depend on a number of factors, including whether or not your business is VAT registered.

Every business will be affected to some degree, as the cost of supplies will increase. Similarly, businesses in virtually every sector are likely to be hit by the knock to consumer spending that it is presumed the increase will deliver.

2. Absorb it or pass it on?

Deciding whether or not to absorb the VAT increase is a key problem facing every business owner, whether or not they are VAT registered.

If your business is VAT registered, you will be legally obliged to charge VAT at the new rate. However, if you so choose, you could absorb the increase and simply keep your prices the same. This would, of course, mean that your profit margins are reduced – but if you are competing mainly on price, absorbing the increase can be a very effective way of increasing (or holding onto) your market share.

Your decision here will likely be based on a number of different factors. For example, are your competitors planning to pass on the increase? Can you afford to do it? Do you really need to compete on price – or can you compete on other factors like quality or service?

3. Consider your accounting software

You should make sure that your bookkeeping and accounting software are up to date and ready for the change. Most reputable accounting software (particularly online packages) will be automatically updated to take the change into account. However, if your business is enrolled in the flat rate scheme or the Cash Accounting scheme, you may need to make manual changes. Check with your software provider in advance to make sure.

4. Understand ‘tax point’ rules

It is important to understand the rules on ‘tax points’, particularly if you often raise invoices some time before supplying the goods. The tax point is the time at which a transaction takes place for VAT purposes. In circumstances where a VAT invoice is issued, the date on which that invoice is raise will normally be considered the tax point. When no invoice is raised, the tax point will normally be the date on which the goods or services are physically supplied.

This causes potential problems if you raise an invoice well in advance of supplying goods. If you raise a VAT invoice before the 4 January 2011, but do not supply the goods until afterwards, VAT would theoretically be charged at the lower rate. You should understand, though, that HMRC takes a very dim view of forestalling. You should seek advice from your accountant to make sure you are not falling foul of forestalling regulations.

More information on business tax can be found on the

5. Prepare new labels

On a practical level, having new printed materials will be a priority for many businesses. You will have to print new labels and new price lists. You may also have to manually update your till system to take into account the VAT rise.

These are all time-consuming and potentially expensive tasks, and yet many businesses leave them to the very last minute. Make sure that you plan ahead to ensure that your consumer-facing materials are accurate.

6. Explain to your customers

Finally, you should be prepared for the potential struggle associated with explaining the increase to your customers. Although the VAT increase has been well publicised, you may well still have customers querying your price rises – particularly if you are dealing primarily with consumers rather than other businesses.

Make sure that all your customer-facing staff are aware of the change, and that they are able to explain it clearly. Often, a simple explanation of the situation will be enough to satisfy a customer.