New Year VAT rise

The new VAT rise could see eligible businesses considering whether they want to opt-out of being VAT registered – therefore potentially having the reverse effect of what the Chancellor had in mind of raising money for the nation’s coffers.

There are concerns that many businesses simply are not prepared for the change.

Some say the recent, short-term drop in VAT to 15% would have got businesses ready for it, but in many cases a lot of shops etc found that it was too much hassle to change their prices for a short period of time, so they just took the hit themselves.

This time, they won’t be doing that, as the VAT change is here to stay so they need to be prepared.

There are some practical things that companies need to consider – firstly are their tills and accounting procedures ready for the change?

Also, if they are selling ongoing services which are only paid every three or six months, there will be some work chargeable at 17.5% and the rest at 20%, so it is worth submitting an interim bill, otherwise they will end up being stung an extra £2.50 for every £100-worth of work sold.

There is also talk that new VAT rise could see eligible businesses considering whether they want to opt-out of being VAT registered.

But businesses have to be careful when considering this. Many people have the impression they can split their businesses up into several parts, thereby bringing some or all of them under the VAT threshold.

But it’s important to get professional advice before doing this as there are strict rules about artificial separation of businesses.

Crucially, you have to convince the Revenue that they are standalone entities, completely independent of each other.

Even if you get the go-ahead for this, it will mean separate accounts and annual returns – increasing bureaucracy and maybe not having the desired effect on your overall bottom line.

VAT rise – Five fast facts

  • The rate of VAT increases by 2.5% on January 4 to 20%
  • The increase will not apply to those products or services such as food and children's clothing (zero rated), children’s car seats, domestic supplies of fuel and power (reduced rate) or education, health and financial services (exempt).
  • For businesses whose products/ services span both pre and post January 4, there needs to be some accounting adjustment. But if you do make a mistake, the Revenue has promised to be lenient and allow rectification with a “light touch”.
  • Just as the amount you pay on your own sales increases, so will the amount of input tax you pay on your purchases. So offsetting one against the other will determine the amount of VAT you have to hand over
  • The 20% tax is not based on the gross sale price to the customer but on the net price to which a formula of 1/6 is applied.

Philip Shuker