Will VAT rate change hurt UK businesses?

(Accountancy Age) – A £12bn shot in the arm for the British economy is hard to argue with, but the extra tax income from raising VAT to 20 percent also means it is the third time UK businesses have had to re-jig their systems in three years.

The VAT rate change – effective from January 2011 – has both financial and resource implications at a time when businesses are still trying to survive the uncertain economic conditions.

But which businesses will find the increase hardest to prepare for and deal with? And will the costs incurred be just high as in previous rate changes or have businesses learned how to deal with the process better?

A VAT increase to 20 percent will have serious repercussions for some small businesses which are unable to absorb the cost, particularly in those industries which have tight profit margins.

And in terms of compliance it will also be the smaller businesses who will struggle again.

Although businesses have gone through this change twice before in recent times and know what to expect to a certain degree, the smaller companies with manual VAT records as opposed to electronic VAT systems will still have a heavy workload to deal with.

“It’s the ones with the manual pricing systems that will find it more difficult than the ones with the electronic systems,” said Derek Allen, head of tax at ICAS.

Having manual records means businesses will spend more time on billing and re-pricing their goods in their accounting ledgers – or pay for an accountant to do it.

Another burden for businesses is the extra work needed to make sure that the first VAT return submitted after the rate change is accurate.

Despite the administrative drain on smaller businesses, most companies sell goods and services at prices including VAT. The physical re-pricing of the goods on the shelves, whether it be a new paper price tag or a different bar code for scanning, carries costs for businesses across the board.

Large outfits that sell many different products in multiple stores will still be affected.

Typical costs during previous rate changes ranged from £25 for very small businesses to £600 for the largest. HMRC’s own data supports the view that the compliance workload for companies will be onerous.

A study compiled after previous rate changes found that businesses spend the most time and money on extra bookkeeping, system changes and re-pricing.

However, the upcoming changes are not as bad as they could have been. To the relief of retail groups and advisers, the VAT rise is not being undertaken in stages, which would have caused more administrative headaches.

Another key point to consider is that businesses have been given a longer lead time to prepare for the change than on previous occasions.

Retailers complained bitt­erly about the administrative nightmare caused by the short notice at the time of the last rate change in January this year.

“It is essential that if there is a rise it happens in one fell swoop, at a convenient date and is not staged, so that administrative costs are minimised,” the Forum of Private Business has said.

The overall costs of the rate change for UK plc will still be significant, but not as high as the two previous changes.

There is a final issue to consider. This may not be the last VAT rise that businesses will have to face. Even at 20 percent the UK will still boast one of the lowest VAT rates of the 27 member states in the EU so the chances of a future hike isn’t outside the realms of possibility.

Businesses may therefore have to brace themselves for more of the same during the lifetime of the coalition government.