ANY business that is registered for VAT will be affected by the forthcoming increase, which will see VAT rise from its current 17.5% rate to 20% at midnight on January 4.
The change only affects items charged at the standard rate of VAT. Goods and services which are zero rated, reduced rated or exempt will be unaffected.
In theory, the change is relatively simple, says the Forum of Private Business (FPB). However, the FPB is warning smaller firms that things can easily get complicated when put into practice.
Forum chief executive Phil Orford explained: “Many smaller businesses will have to changes their prices before they start trading on January 4 and this will take a sizeable amount of forethought for retailers with thousands of items in their product ranges. Businesses can of course keep their prices the same and absorb the increase but this will affect the bottom line.”
Mr Orford continued: “The main problems we foresee for businesses will be with their accounting systems. Firms will need to make sure that their accounting system changes accordingly and is issuing invoices and recording sales and transactions at the new rate from January 4. Any outstanding invoices for work which was genuinely carried out before the date can still be processed at 17.5% so most businesses will probably need to create a new standard VAT code at 20%, but retain a code for the old 17.5% rate.”
SMEs running company cars on contract hire or on a lease will also need to adjust the amount of VAT that can be reclaimed which is 50% of the VAT charge on the rental (assuming there is some private mileage involved). However, on any maintenance agreement, 100% of the VAT can be reclaimed.
Mr Orford added: “The good news is that HMRC says it will be taking a ‘light touch’ in dealing with errors made in the first VAT return after the change if the error relates to the change of rate. If you do, however, realise you’ve made a mistake, you’ll need to issue a credit note and then a new invoice at the correct rate to put things right.”
The Forum also suggests that small businesses invest in online accounting software in order to make the VAT change process a painless one.
Further information
You might like to read our Special Report How finance lease can help beat the VAT increase.
On January 4, 2011, the standard rate of VAT rises to 20%
