Coping with the VAT increase

VAT is now at its highest ever rate, having risen to 20 per cent from 17.5 per cent.

The coalition government’s decision to increase this regressive tax has been widely criticised, and many retailers are concerned about the potential impact on consumer spending. The government maintains that it is a necessary step if the budget deficit is to be reduced.

Either way, the VAT increase is here to stay. As a business owner, you need to understand what it means for you, and how your firm can cope with it.

Absorb it or pass it on?

Perhaps your most important priority is to work out whether you should absorb the VAT increase or pass it on to your customers. You will ideally have already made this decision, but thousands of businesses across the country have been caught out by an increase so close to the holiday period, and are still struggling to develop a strategy.

If your business is registered for VAT, you have no choice but to charge the tax at the new rate. This does not necessarily mean, however, that you need to increase your prices. Instead, you might choose to absorb the increase and cut your profit margins – in the hope that you will be able to draw customers away from your competitors.

Your decision will depend in great part on the tactics of your competitors, and on the nature of your business. If you compete primarily on price, absorbing the increase might well be a good choice – particularly if your competitors are passing it on. You should, however, always keep in the forefront of your mind the question of affordability. Can you afford to absorb the increase? If so, consider whether or not it is the right choice. If not, accept that you will have to pass it on.

Train your staff

Customer-facing staff will inevitably bear the brunt of the increase, as it is these employees who will have to explain why prices have gone up. It is therefore vital that they know exactly what is going on.

Customers can often be assuaged with a simple explanation; they will generally understand that you have not chosen for prices to go up, but that the decision was made by the government. You should consider giving shop floor staff a bit of patter to help them explain this clearly to customers.

Print new pricing information

One of the things most likely to put a customer off making a purchase is picking an item off the shelves and taking it to the counter, only to find that they are being charged more than the amount marked.

You should therefore make sure, as a priority, that the pricing information on display to customers is correct.

Review suppliers

It is important to remember that your suppliers will also be struggling to cope with the VAT increase – and they will also be working out whether or not to pass that increase on. While this will inevitably mean that your costs will rise, you may also be able to use it to your advantage.

Use this as an opportunity to shop around for better deals. If your current widget supplier is planning to pass on the increase, you might be able to find another widget supplier who is willing to absorb it.

Remember, though, that companies like your mobile phone provider will inevitably be passing on the increase – as will their competitors. So, while you might well choose to shop around for a cheaper deal, you should not expect to be able to find companies of this sort willing to absorb the increase.

Check accounting software

Finally, you should remember that the increase will have an impact on your record-keeping. With any luck your accounting and book-keeping software will have been automatically updated to take the increase into account. You should check to make sure that this has happened – and if it has not, you will need to make the change manually.

You should also bear in mind that confusion can arise when an order was placed before the increase, but paid for or fulfilled afterwards. For more on this, read our information on tax points.

Photo courtesy altogetherfool on Flickr.