Small Businesses Divided on How to Deal with VAT Increase

Businesses are split about how they will deal with the increase in VAT due to come into effect on 4th January 2011.

6 in 10 businesses believe that the increase in VAT from 17.5% to 20% will affect their organisation’s cashflow to some extent. Nearly one tenth (9%) think cash flow will be affected to a significant degree.

The Institute of Chartered Accounts in England and Wales (ICAEW) is urging companies to start preparing for the VAT rise before the Christmas rush.

Businesses affected by the VAT increase are divided in their approach as to how to deal with it – over a third are likely to absorb the costs within the business (36%), under a third expect to increase their prices (30%) and the remaining third (34%) plan to do both (absorb some costs and increase some prices). Furthermore, the continued changes to the rate of VAT over the last two years has meant that a third of businesses (33%) now find it the most burdensome administrative task in terms of time spent compared to payroll (50%) and corporation tax (12%).

Frank Haskew, Head of Tax at ICAEW, said:

“Businesses have faced a number of admin burdens over the past two years as the VAT rate was first reduced to 15%, then restored to 17.5% and now to be increased to 20%. At a time when companies are facing a tough 2011, having to change the VAT rate is not a good way to start the new year. Many will be worried about the effect it will have on sales in the first quarter but preparation is the key to help ensure the transition is smooth.”

The change only applies to the standard VAT rate. There are no changes to sales that are zero-rated or where VAT is charged at the reduced-rate. Similarly, there are no changes to the VAT exemptions.

ICAEW reminds businesses that:

  • If there is an overlap of goods and/or services around 4 January 2011, the VAT charge can be split on a fair and reasonable basis so that 17.5% tax is charged on the value of supplies before 4 January 2010 and 20% on work carried out after this date.

  • Don’t forget that any credit note or refund given to a customer is based on the same rate of VAT that was charged on the original sale. The same principle applied to VAT claimed on bad debts.

  • If you are a non-VAT registered business considering making a capital investment, you may want to bring it forward to benefit from the cheaper rate. Consumers considering major purchases such as a new car should also think about doing so before 4 January 2011. Always check supplier terms carefully and make sure that any VAT savings made by advancing purchases are not offset by higher costs.

  • Remember that HMRC are likely to be less lenient than with previous VAT changes as companies are more used to the changes and there has been sufficient notice given. Penalties and interest could be charged by HMRC if mistakes are made.

  • Start preparing as much as possible for the rate charge. Are the relevant employees in accounts going to be available at the beginning of January to sort out queries? Are there any supplies that will cross over the two rate period?

Further information can be found at

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