System Consequences of the VAT Rate Change

Now the standard VAT rate in  the UK has increased, here are some tips on dealing with it with your systems over the transition period.

This is the latest in a series of articles I've written for the IT Faculty of the ICAEW. These cover how to benefit from management reporting, KPIs, cloud computing and other topics to profit from technology.

January's VAT Rate Increase – Why's it Different?

With the “Comprehensive Spending Review” ringing in our ears, it’s easy to forget that there will be an increase of standard-rate VAT to 20% on 4 January next year.

This is no doubt painful for you if you live in the UK. But for businesses trading in the UK, it’s easy to think this is just a repeat of the last increase this last January. It’s not. There will be several different consequences for systems and commercial arrangements, such as:

1. Have you changed any systems since the last increase?
2. Has the supplier of any of your systems changed their advice? Or issued an upgrade that needs to be implemented?
3. In any case, are you happy with what you did last time, or would you do it differently?
4. The last increase was a reversal of a decrease. With only four days notice of the decrease, many businesses took a short cut on aspects such as pricing which were simple to reverse. This is not the case this time.
5. How will any VAT-inclusive pricing be changed?
6. The change mid-month is also an issue for anyone trading online or offline over the New Year  period

There are also a number of issues that are the same, some of which are:

1. Do your staff understand the rules around credit notes, and transactions that span the transition?
2. If you are using any SaaS cloud systems, who is going to change the rate – your provider or you? In any case, are you happy with the way your provider is going to implement it?
3. If you interface financial transactions from one system to another (including transfer into spreadsheets for reporting), will the VAT element be handled properly?
4. How will your expenses system cope, given it has to be used by many of your staff?

Further issues and advice can be found in this other VAT rate change article. This and other relevant articles can be found in the list to the left of this one.

Mistakes can be expensive. For any type of business, there are VAT penalties, you can incur unnecessary administration costs during the transition, and management reporting may be incorrect. For B2C businesses of course pricing is crucial. Will that £9.99 item be re-priced, or will you take the hit?. It's therefore worth planning and implementing carefully.

What do you need to do to ensure your business, its systems and your staff are ready?

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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.