Analysis: Will VAT rate change hurt UK businesses?

A £12bn shot in the arm for the British economy is hard to argue with, but
the extra tax income from raising VAT to 20% also means it is the third time UK
businesses have had to re-jig their systems in three years.

The VAT rate change – effective from January 2011 – has both financial and
resource implications at a time when businesses are still trying to survive the
uncertain economic conditions.

But which businesses will find the increase hardest to prepare for and deal
with? And will the costs incurred be just high as in previous rate changes or
have businesses learned how to deal with the process better?

A VAT increase to 20% will have serious repercussions for some small
businesses which are unable to absorb the cost, particularly in those industries
which have tight profit margins.

And in terms of compliance it will also be the smaller businesses who will
struggle again.

Although businesses have gone through this change twice before in recent
times and know what to expect to a certain degree, the smaller companies with
manual VAT records as opposed to electronic VAT systems will still have a heavy
workload to deal with.

“It’s the ones with the manual pricing systems that will find it more
difficult than the ones with the electronic systems,” said Derek Allen, head of
tax at ICAS.

Having manual records means businesses will spend more time on billing and
re-pricing their goods in their accounting ledgers – or pay for an accountant to
do it.

Another burden for businesses is the extra work needed to make sure that the
first VAT return submitted after the rate change is accurate.

Despite the administrative drain on smaller businesses, most companies sell
goods and services at prices including VAT. The physical re-pricing of the goods
on the shelves, whether it be a new paper price tag or a different bar code for
scanning, carries costs for businesses across the board.

Large outfits that sell many different products in multiple stores will still
be affected.

Typical costs during previous rate changes ranged from £25 for very small
businesses to £600 for the largest. HMRC’s own data supports the view that the
compliance workload for companies will be onerous.

A study compiled after previous rate changes found that businesses spend the
most time and money on extra bookkeeping, system changes and re-pricing.

However, the upcoming changes are not as bad as they could have been. To the
relief of retail groups and advisers, the VAT rise is not being undertaken in
stages, which would have caused more administrative headaches.

Another key point to consider is that businesses have been given a longer
lead time to prepare for the change than on previous occasions.

Retailers complained bitt­erly about the administrative nightmare caused by
the short notice at the time of the last rate change in January this year.

“It is essential that if there is a rise it happens in one fell swoop, at a
convenient date and is not staged, so that administrative costs are minimised,”
the Forum of Private Business has said.

The overall costs of the rate change for UK plc will still be significant,
but not as high as the two previous changes.

There is a final issue to consider. This may not be the last VAT rise that
businesses will have to face. Even at 20% the UK will still boast one of the
lowest VAT rates of the 27 member states in the EU so the chances of a future
hike isn’t outside the realms of possibility.

Businesses may therefore have to brace themselves for more of the same during
the lifetime of the coalition government.

Further reading:

EU
beefs up anti-VAT fraud efforts

VAT increase as
costly to businesses as earlier drop

ECJ
deals blow for businesses trying to reclaim VAT