19-Oct-2010 14:32

Ouch! Will it hurt you or your business?

We're about 10 weeks away from the VAT rise to 20% & the third change to your business accounts and systems in 3 years or so..

The new 20% rate - effective January 1st 2011 - will apparently raise £12billion for the country, (our) finances and economy, but will it cause pain for you personally and for your business?

Will your business be able to absorb (although I suppose we have little choice) the costs?

Does your service or product work on such tight margins that the VAT rise to 20% will have a great impact?

Many of us sell goods and products that quote prices inclusive of VAT. Shops and online stores offer goods inclusive of VAT & will need to physically change website prices or re-price goodies on shelves?

You may need to print new brochures, flyers, price lists…

Will you have to spend valuable hours & resources changing your accounting systems and records again, or perhaps even incur extra accountancy fees to do so?

I wonder if the government and Exchequer have really thought this through...

Oh, and just to raise your spirits a little…...

…...remember that even at the new January 1st 2011 level of VAT at 20%, the UK still boasts one of the lowest VAT rates of the 27 states in the EU, so the chances of a future hike in rates is a real possibility.

Brace yourselves folks!

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Contributed by Mark Lee on 20-Oct-2010 14:29
The VAT rate increase creates cashflow issues as costs go up - even though VAT is not a cost to VAT registered businesses.
Most accountants are so registered and can fully recover all the VAT they are charged by third parties.

Smaller practices that are not VAT registered operate as Sue suggests and look at the aggregate VAT inclusive cost (as do financial advisers and bankers - ie: businesses that are exempt from charging VAT and thus unable to recover the VAT they pay).

HMRC takes a dim view of businesses that try to split their services so as to keep one of them below the VAT threshold.
Far better to ensure you have two distinct business offerings - eg: one on one mentoring (which is provided to one man businesses and employees) and a bigger training business (which provides services to bigger businesses). As long as you expect the former to bill no more than the VAT registration threshold each year...

NB: Would only be worth doing if the expected PROFITS of the smaller business would be sufficiently high to cover the extra costs of establishing and running two businesses. (at least one of which would need to be a limited company).
Contributed by Sue Cohen on 20-Oct-2010 10:19
Yes, I know it is all allowable as expense/purchase, it's just how they see it.

£425 + VAT at 17.5% = £499.37; ie "500 quid all in"; Add 20% VAT and it's now £510 For a small NFP organisation, it's just a little bit more noticeable. It is unlikely to make them change their mind, but it's a little niggle.

If they are like some I know they work out their costs "all in", so they would expect it to be, say, £416 + VAT at 20% = £499.20. Again, not a huge difference, but a niggle.
Contributed by SimplyFone Blogger on 20-Oct-2010 09:57
Hi Sue.

The fact that clients - charities or otherwise - are not vat registered should not impact on your charges.

The invoices you supply + vat to them can be entered on their books/accounts in full and fully reclaimed as an expense/purchase.

If you have many clients who may argue about the additional 20% vat charge (which presumably all your competitors charge anyway) it may be worth forming a new company, non vat-registered, to cope with those clients.

Only a suggestion and I'd strongly recommend you check the legal ramifications too…

Wishing you continued success.
Contributed by Sue Cohen on 20-Oct-2010 09:51
It's an interesting point - I registered when I first started in business as I was aniticipating mostly B2B work and wanted to claim back what little input tax I incurred.
Most of my work it's still not an issues.

BUT some of my work is with financial services providers who aren't VAT registered and it might well impact the price we agree.
I've also done a little work for a charity organisation and, if they want another similar session, we might well agree to "split the difference".
My systems are simple, so the administration isn't an issue for me.

For many small businesses and those in retail and with high volumes, it's this administration which is more of an issue than the impact they anticipate on turnover itself.
Contributed by Peter Syme on 19-Oct-2010 15:29
As I sell a huge amount B2C with VAT inclusive and purchase very few VAT supplies each month I have no choice but to pass it on to the customer as margins are already tight. I also agree with you that this will not be the last rise. Just glad they gave us notice so we can change systems etc well in advance.

Also being in area of non-essential spend I suspect the next few years will be challenging from a business perspective. However, always huge opportunity when these situations happen so have been restructuring to be able to grasp the opportunities when they come along.


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