Businesses divided on how to deal with VAT increase

BUSINESSES ARE SPLIT about how they will deal with the increase in VAT early next month, an ICAEW survey has found.

More than a third (36%) of businesses affected are likely to absorb the costs of the rise in VAT from 17.5% currently to 20% on 4 January, the survey of 1,000 chartered accountants found.

Some 30% of businesses expect to increase their price, and the remaining third (34%) plan to do both – absorb some costs and increase some prices.

Changes to the VAT rate 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%), the survey also found.

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 ICAEW advises businesses to prepare early for the VAT rise, ensuring that they have enough staff in accounts to deal with VAT queries, and check whether any supplies will fall under a cross-over period between the two VAT rates.

If there is an overlap of goods and/or services around 4 January, 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, the ICAEW said.

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