VAT changeback to cause potential blackspot for FDs

With VAT due to revert to 17.5% from 1 January 2010, finance departments have been readying themselves for the change by focusing resources on their pricing, billing and VAT recovery operations.

When the government cut VAT from 17.5% to 15% on 1 December 2008 it was clear that this act of fiscal stimulation would be a temporary one ­ so while companies had little warning of the cut, they had plenty of notice about its reversion to the higher rate.

Gary Harley, head of indirect tax at KPMG, says that having gone through one rate change, finance departments should be set fair to comply on time. “They already have a process in place. It is a relatively straightforward issue and they will have documented the changes they had to go through when the rate went down. If they haven’t asked for system changes already, they will need to make sure the organisation has a robust manual workaround for that period between the new rate coming in and any upgrade to their system.”

New Year’s hangover
But while system changes seem to be a straightforward matter, there have been some questions on making the change workable for those businesses trading over New Year’s Eve and into January. Concessions have been made for businesses operating beyond midnight on New Year’s Eve: pubs, clubs, restaurants, some retailers and telecoms companies have until 6am on 1 January 2010 before they need to start charging the additional 2.5%. Bill Dodwell, head of tax policy at Deloitte, says the rise is still likely to prove a headache elsewhere, particularly for major retailers.

There are two areas of concern that strategically involved FDs will need to ponder and plan for. The first is around ticketing, advertising and promotional material. “Legally, you are not supposed to charge more than advertised, so there is an issue for retailers who will have to get tickets on items changed in a very short space of time,” says Dodwell. They will have to do that in advance of the January sales at a time when staff are already hard pressed, he points out.

Finance directors have also had to identify nuances such as those around credit notes. “If an invoice has been raised with VAT at 15% they will need to be careful that any credit note isn’t issued at 17.5%,” says KPMG’s Harley.

The second issue is the potentially thornier one of consumer perception. “The real question is how is that going to play with consumers. The idea that you are going to charge more than the advertised price is a deeply unappealing one. It is clear that people are going to have to put a lot of effort into this and it is likely that we will see different consumer strategies around handling it.”

The reversion to 17.5% is not the only VAT change on the horizon. The New Year also brings in changes to rules meaning that companies sourcing administrative, helpline or back office services from locations outside the EU may now incur VAT, where previously they did not.

After 1 January 2010, those companies operating in sectors such as banking, insurance and healthcare that outsource functions abroad will have to account for VAT under the reverse charge mechanism and incur 17.5%, unless they can show that those functions, if provided by a UK company, would be exempt from VAT.

Cost concerns
KPMG’s Harley says this fundamental shift could lead to significant cost for businesses, with call centre services, data processing and other administrative functions likely to be caught. In addition, all sectors will have to complete statistical declarations recording the value of services supplied to business customers across the European Union. “This is an additional compliance cost for business at a time when they are facing very difficult conditions. Unfortunately, there is plenty of stick but not much carrot in these proposals,” he says.

Belinda Doshi, outsourcing and technology lawyer at Field Fisher Waterhouse, says the changes may make outsourcing more costly, but a knee-jerk reaction ­ to terminate outsourcing arrangements, for example - is to be avoided. “That is the nuclear option and can take months to renegotiate, if not a year. While 17.5% is a big hit, you can mitigate the cost increase.”