Are you ready for the VAT increase?

The VAT increase from 17.5 percent to 20 percent on the 4th January 2011 is not far away now and presents small businesses with extra administration during what is an already busy Christmas period. To give business owners a helping hand when adjusting their books in line with the change, Intuit UK has provided some useful advice that covers the major areas affecting UK small business and highlights the potential pitfalls – as well as opportunities – the VAT change will bring.

Notify your customers of price changes
If you are passing the VAT increase on to customers, it is a good idea to give them practical examples of what the prices will look like from the 4th January 2011. Under the Price Marking (Amendment) Order 2009, you will have 28 days in which to update your ticket prices. Meanwhile, you will need to display general notices which advise customers that prices will be adjusted at the till to take account of the change.

It’s also important not to forget to update catalogues and sales literature which still reflect the pre-4th January 2011 prices. While you may still use the old versions for up to 28 days after the VAT rate change, you must attach a label that clearly states the price change and include information so the customer can calculate the adjusted price.

Do your cash flow forecasting
Whilst there aren’t many shopping days left, the increase in VAT may result in a potential rise before, and then fall in sales after the 4th January. Cash flow forecasting should take account of this potential rise and then fall.

Be aware of transactions that span the VAT change
There may also be transactions which span the VAT change date so it’s worthwhile noting that regardless of whether a business uses standard or cash VAT accounting, it is the tax point that determines the rate of Standard VAT to be applied. For cash accounting, this means that even if payment is received or made after 4th January 2011, the 17.5 percent rate will be due on supplies and purchases made before 4th January 2011,
If you are trading between the 1st and 3rd January 2011, be aware that when you come to prepare your VAT return, you will have a mixture of both 17.5 per cent and 20 per cent transactions.

Use the VAT increase to cash in on the bumper bank holiday weekend
While the increase is the third change in three years it can be used as an incentive to encourage customers to do more shopping before the increase kicks in.

The New Year bank holiday weekend on Monday the 3rd January will surely see a flurry of sale grabbing shoppers hitting the high streets and online. What’s more, according to a survey by the British Retail Consortium (BRC), almost two thirds of retailers expect sales over Xmas to be at least the same or better than in 2009. Therefore, if you are trading over the holiday period and busy bank holiday weekend, it may be possible to use the opportunity to boost sales by taking advantage of the festive period.

The VAT rise means firms should also reassess their foreign currency purchases.
This indirect tax is a cost that will likely be passed on to consumers via an increase in the price of goods and services and would see each of the UK’s 26.2m households paying an extra £1.16 per day or £425 a year in tax. This rise is expected to create large inflationary pressures, which will in turn increase the probability of the MPC raising interest rates in order to stabilise the economy; with many economists predicting a rise in interest rates to 20 percent by the end of the decade.

Adrian Jacob from leading foreign exchange company Currency UK advises that “As investors are attracted by the higher sterling rate of interest, the amount of funds flowing into the UK will increase causing an appreciation in the value of the pound.”
“Over the last year, the low value of sterling has greatly reduced the purchasing power of importers and those who did not forward purchase currency could have lost out on over 20 percent of their profit if dealing with Euros and 15 percent if dealing in US Dollars.”

“It is therefore essential that importers and exporters take steps to reassess the ways in which they purchase their foreign currency in order to minimise risk and make the most of this opportunity.”

One option available is the Limit Order in which a business can set a target rate for trade of their currency and leave it to the experts to monitor. Should the desired rate be reached, the trade will automatically be executed. Similarly another option is the Stop Order. In this scenario, the business sets a minimum acceptable price and if the market falls to that level, the currency trade will be executed automatically. This favours the more risk adverse business but still allows flexibility to benefit from positive market movements.

For many businesses, the strengthening pound will be the time to consider forward purchasing currency. This removes all the currency risk as a set price is agreed for all exchange transactions for a 12 or 24-month period. The business owner can then concentrate on running the company without the additional worry regarding the impact of the exchange rate. Jacob warns that smaller businesses are already losing up to £1.5bn a year on foreign exchange transactions while they watch big businesses get preferential treatment from banks. SMEs are charged up to three percent of their transaction in fees by banks and the advice given is to compare the foreign exchange provider market.

Intuit UK is a leading provider of business and financial management solutions for small organisations and their advisors including accountants and bookkeepers. The flagship product QuickBooks is designed to help small businesses succeed through taking the worry out of managing business finances. www.intuit.co.uk.