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Planning for the VAT increase

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* Understand the impact: Consult government websites and business news sources to conduct thorough research and understand what the 2.5 per cent VAT increase will mean for your market sector and your specific business.

* Make a decision on pricing: As with any significant tax increase, businesses have the choice of passing it on to customers by raising their prices, or absorbing the increase themselves. It’s important to weigh up the pros and cons of each approach before arriving at a decision. While it might be tempting to let your customers bear the weight of the increase to avoid a downturn in profits, doing so may see a significant reduction in sales, particularly if your competitors have opted to keep their prices the same. On the other hand, if you freeze your prices at their current levels, you may lose a small amount of profit per unit but benefit from steady sales. When considering pricing strategies it’s vital to pay close attention to the market and to your direct competitors.

* Consult suppliers: With the VAT increase affecting businesses at all levels, it’s prudent to contact your key suppliers now to see whether they’re planning to increase the prices of their services or whether they intend to absorb the increase themselves. With this knowledge, you can plan your own pricing strategies more effectively before the January increase comes into effect. If you have a long relationship with the supplier they may opt to absorb all or part of the increase in recognition of your continued custom.

* Keep customers in the loop: If you do decide to increase your prices, make sure that your regular customers understand that this is due to the VAT increase. If you’re planning to absorb the hike yourself, make sure your customers know this also, as this may garner beneficial publicity in the media and through word of mouth.

* Put your accounts in order: Make sure that your business’s accounts are in order before and after the increase, particularly for transactions during the crossover period. Hold in-depth consultations with your accountant to ensure that you’re both on the same page and that you fully understand the financial implications of the VAT hike for your company and its operations.

* Prepare for a slump in sales: When planning your business finances, be sure to take into account the realistic possibility of rapidly declining sales in the immediate aftermath of the VAT increase. If you have chosen to absorb the increase yourself, this decline may be minimal. But expect a reduction in sales at least in the short term, as the general cost of living increases and consumers and businesses alike tighten their belts. Prepare a number of plans that take into account the worst-case scenario of a prolonged and dramatic slump, as well as less drastic alternatives.

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Terry Irwin is managing director of TCii Strategic and Management Consultants.

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