VAT increase – prepare and prosper
The headline rate of VAT increases to 20% from 4 January 2011 and will have important implications for your business. We offer some valuable tips to help you prepare and lessen the impact.
For many businesses, VAT paid on purchases is fully recoverable. The increase will produce only a small change – positive or negative – in net cash flow. But it represents an extra cost for consumers and small companies not registered for VAT or who use the flat rate scheme and operate on tight profit margins. So, particularly if you sell direct to consumers or cannot reclaim all the VAT, there are several things worth considering.
Think hard about pricing. Are you going to pass on the extra VAT to your customers or absorb it yourself? Absorb it and you lose 2.1% in revenue (120/117.5); passing it on means a price increase to customers of the same 2.1%. If your product or service is unique or you use other selling points, for example, outstanding after-sales care as a differentiator, absorbing the increase may not be necessary. But if your market is highly price sensitive, this could open the way for competitors and you need to think twice about passing the increase on.
If you provide services rather than goods and have non-VAT or flat-rate paying customers, offer to invoice them early, before the rise. They’ll welcome the gesture and it should help your cash flow. But take care that payment of the invoice is due within six months of the invoice date.
Talk to your employees. As they are ‘at the coal face’ of your business, ensure they understand the impending changes. Provide them with a few ready answers, should customers query any price hikes – such as ‘it is the government’s decision, not ours’ which could persuade the customer to accept the higher cost.
Check supplier contracts. You may see your overheads increase as suppliers put up their prices and this could be the deciding factor on whether or not to pass on the increase. If you are not already VAT registered but make a large number of VAT-liable purchases, registration may be a more attractive option.
Review current accounting systems. Sole traders, start ups and SMEs should have a technology solution in place by 4th January that is capable of accommodating the rise. This will ensure a seamless transition and will free up time for core business activities.
Get your record-keeping right. Despite the problems you are likely to encounter, HM Revenue and Customs are unlikely to take a kind view of companies who fail to keep up proper accounts, and errors are expensive. Those companies with manual pricing systems in particular may struggle with the extra work needed to make sure that the first VAT return submitted following the hike is accurate. Issues to tackle include:
• Reporting at two different rates within a single accounting period;
• Applying the new rate to sales orders in progress;
• Equivalent changes in purchasing, self-billing standing orders and direct debits;
• Applying different rates to VAT-inclusive purchase invoices or employee expenses systems during the transition;
• Issuing and receiving credit notes;
• VAT-inclusive sales pricing in retail and ‘etail’ systems;
• Quotations where words/prices will need amending;
• Forecasting and budgeting systems.
You should make sure you seek advice from your accountant to help you deal with issues of this sort.
Focus on marketing. If you plan to absorb the increase, make a lot of noise about it after 4th January. Even if you plan to pass the increase on you can still exhort potential buyers to purchase pre-4th January, before the increase takes hold.
Get set for a pre-hike surge. Consumers generally rush to take advantage of ‘bargains’ before a VAT rise. Especially if you deal in big-ticket items you should ensure that you’re ready for it.
And then the post-hike lull. Retailers should expect sales to suffer. How long for is a matter of debate but you should factor this eventuality into your cash flow forecasts.
Although the overall costs of the rate change could still be significant, they won’t be as high as the previous two changes. By thinking ahead you can minimise the difficulties for your firm – and possibly even profit from the change.
(Image from: mark-lawton.com)