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VAT increase: how, what, when, who?

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Remember the Emergency Budget? Seems like ages ago. But measures announced by George Osborne are starting to creep up on us, and you need to start paying attention and thinking ahead.

Yesterday we discussed how the NIC holiday – which comes into effect next Monday 6 September – will impact (or, more likely, not impact) your business.

Today, we look at the impending VAT increase. Eh? Another VAT increase? Again? Yes. Here are the basics:

What’s happening?
In his Emergency Budget, George Osborne announced an increase in the standard rate of VAT from 17.5 per cent to 20 per cent, effective from 4 January 2011.

How will it affect me?
The increase will affect any VAT-registered business that sells or purchases goods/services that are subject to the standard rate of VAT.

From 4 January 2011, you must charge VAT at the rate of 20 per cent on any sales. But note that this doesn’t affect other VAT rates such as zero rated goods (food, children’s clothing, books), reduced rated (children’s car seats, domestic fuel and power), or exempt goods (education, health, financial services).

What should I do?
The main advice is: don’t just wait and hope it goes away. Start planning now and start reviewing your pricing strategy.

Don’t forget the IT side – if you’re a retailer, you’ll need to adapt your POS till systems so they charge 20 per cent VAT from 4 January 2011. This can be tricky, so start asking your till system provider for advice.

For businesses selling bigger kit, you could actually view the VAT increase as a sales/marketing opportunity. Why not push your customers to close that sale you’ve been working on before the VAT change? HMRC has issued “special rules” around this.

As long as the customer has taken away (or you have dispatched) the goods to them before 4 January 2011, your sale is considered to have taken place before the change.

HMRC guidance is clear: if you issue a VAT invoice on or after 4 January 2011 for goods or services that you completed before 4 January 2011, you can apply the 17.5 per cent rate.

It’s a win-win situation: your customer will only be charged 17.5 per cent VAT instead of 20 per cent, and you’ll have pushed a sale through.

How much do I need to increase my prices by to take account of the increase in VAT?
To increase your VAT-inclusive prices to reflect the increase in the VAT rate to 20 per cent, you should multiply your old prices by 120/117.5

So if you were selling a computer for £500, this will rise to £510.64 (500 multiplied by 120 is 60,000; then divided by 117.5 gives you 510.64).

But note that you don’t have to pass on the VAT increase directly to your customers – that’s a commercial decision that you must make yourself.

What happens if I make a mistake?
Abandon everything and flee to Mexico!

Just kidding. If you make a mistake, you can still make amends. HMRC tells us that it will operate a “light touch” in dealing with errors made in the first VAT return after the change, where the error relates to a change of rate issue. If you make mistakes, you should correct them through the normal error correction procedures (either through your current VAT return or, for larger mistakes, by submitting a form VAT 652).

I’m still confused. Who can I call?
You could try Ghostbusters, but if they’re not answering, the best port of call is HMRC’s dedicated VAT helpline, which you can reach at 0845 010 9000 (Monday to Friday 8am to 8pm). If they’re not helpful, drop us a note and we’ll see if we can speed things up or help you.

VAT is a big deal, so we’ll be bringing you some more coverage of how the VAT increase will affect your business, and what you can do to prepare.

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