How can the new rate of VAT be handled in shops and webshops?

Re-pricing a whole product range in a shop or web shop can be a major and costly exercise. One approach is to continue to price at 17.5%, but set up a discount code on the tills or webshop that can be applied to every sale. The discount rate is around 2.1%, not 2.5% (* see below).

On web sites the discount is often known as a "promotional code".

Currys have implemented this approach immediately, before 1 December, effectively passing on the VAT reduction at their own expense for the next few days.

Re-pricing and re-labelling can then be done at a time of the retailer's choice.

But care needs to be taken where a shop provides items that are not all standard rated.

* The discount to be applied is (117.5-115)/117.5 x 100% = 2.128%

How should the master VAT rate be changed in a system?

As mentioned in a previous post, there can be more than one way to implement the change in standard rate in a system, where multiple rates are allowed.

Sage have announced the following recommendations for their Line 50 / Sage 50 software:

1. The master rate (usually T1) should be changed to 15% for 1 December to avoid problems with system defaults
2. A new rate code (say T3) should be set up for 17.5% to handle raising credits for pre-December sales, if required
3. Supplier invoices that are standard-rated should be entered as T1, and the calculated VAT amount over-typed to match the invoice
4. Other detailed advice, especially where cash accounting is being used

This is likely to be the general approach in many systems large and small, but is worth checking with the software provider.

What systems will be affected?

Various types of financial systems will be affected, including:

1. Sales and ledger systems that calculate VAT from a base price will need the rate changed. Various transition issues will need to be addressed. See notes in previous post.
2. Sales and purchasing systems that have VAT-inclusive prices will need to be adjusted
3. Quotation and purchasing systems may need the Ts&Cs adjusted
4. Employee expense systems that back-calculate VAT from VAT-inclusive figures will need to handle expenses incurred either side of 1 December
5. Forecasting systems will need to apply different rates of VAT at different times

The systems you use will likely include a mixture of packaged software, spreadsheets and other internally-developed systems. The changes needed for each one will need to be evaluated, and actioned swiftly.

How do I handle the VAT rate change in my systems?

From 1 December 2008, the UK's standard rate of VAT will change to 15%. It will revert back to 17.5% just over a year later, on 1 January 2010.

It has been well over fifteen years since the standard rate was last changed. Modern systems simply haven't had to handle this, and some will be better designed than others to cope.

The official VAT guidance is at
http://www.hmrc.gov.uk/pbr2008/measure1.htm

Whilst the change will apply immediately on each date, there are a number of circumstances where the old VAT rate will continue to apply:

1. Refunds and credit notes should be made at the same VAT rate as originally charged
2. In certain sales situations where cash receipt, delivery and/or invoicing don't all take place on the same side of the change date
3. Supplier invoices need to be recorded according to the VAT actually charged

Therefore in practice there will be a transition period after each change when two standard rates will be in use for sales and purchases.

In most cases the standard rate in a system will be changed to 15% on 1 December, and later back to 17.5%. But for systems that allow multiple VAT rates, it's worth checking whether it would be better to set up a new 15% rate, and keep the old standard rate unchanged.

In any case, end-users need to be advised how to handle transition arrangements.