Top Menu

Osborne increases VAT

This week’s Emergency Budget included a whole host of measures designed to be, in Chancellor George Osborne’s words, ‘tough but fair’ – including a rise of the rate of Value Added Tax (VAT) to 20% as from 4 January 2011. But what does this mean in reality for you and your business?

The practical side – updating your records

If you are using an online accounting system such as Fusion Accounts, you don’t need to worry about waiting for delivery of new software and then installing a complex upgrade to ensure your invoices and reports reflect the right VAT rate – this is all done for you automatically without you having to lift a finger. However, if you’re a retailer, you’ll need to go through the process – again – of repricing your products at point of sale to ensure that you’re up to date. As many retailers use the Christmas period to perform stock takes, it probably makes good sense to combine the two. Remember that not all products are liable to the standard rate VAT – such as children’s products and certain foodstuffs – so check with your accountant if there’s anything you’re unsure of.

Will consumers buy less due to the VAT rise?

It’s the question on every small business owner’s mind right now – will the VAT rise affect my turnover? The reality is, until we reach January 2011, we just won’t know. A post-Budget survey of 300 people by Kelkoo has already found that 31% feel that the VAT rise is necessary, and that figure may well rise as the full ramifications of the Emergency Budget become clearer. In real terms, the VAT rise will increase the price of an item currently priced at £117.50 by just £2.50, so we can realistically expect that there shouldn’t be too much impact upon buying habits.

The real question may be, ‘should I absorb the increase into my margin?’ Don’t make any rash decisions – take a look at what your competitors are doing and what the groundswell of opinion is amongst business owners nearer the time. Don’t forget that your accountant or book-keeper is your best friend when it comes to advising you in financial matters; they’re not just there to process your invoices and print reports from your online accounting system!

What about small businesses which aren’t VAT registered?

If you’re not VAT registered, then it’s a little of a ‘swings and roundabouts’ situation –  your overheads may go up slightly if you’re buying from VAT registered companies, but you’ll retain a little extra competitive edge over those VAT registered competitors who don’t absorb the rise. However, the rise is relatively small and if you use the changeover period to increase your rates slightly in line with the VAT increase, you could see little impact at all – or even a slight benefit.

Book-keepers and Accountants – how does the change affect you?

If you manage the accounts for external businesses, you’re likely to have an influx of queries in the next few days from clients, looking for guidance on how this will affect their budgeting and planning for next year – so expect your phone to be ringing off the hook this week! The announcement has come in plenty of time to include within 2011 cash flow and budgeting plans, and you may be best placed to advise your clients individually upon whether absorbing the VAT rise is the best strategy for their business.

The good news for those of you who are using online accounting systems is that come January 4th 2011, you won’t be racing around your clients’ premises to install their upgrades for them. If your clients are using traditional software solutions instead of online accounting systems, now’s the time to advise them of the benefits – not just the instant adjustment of the VAT rate, but the ease of access for remote working and access to financial records. 

Accounting Software provided by online accounting provider Fusion Accounts, small business accounting software