One of the worst kept secrets leading up to the emergency budget in June was that VAT would rise. The business world had braced itself for the change and the fact that the increase to 20% is not taking effect until 4 January 2011 actually went some way towards boosting business confidence.
Unfortunately, the fact that we have some six months to get ready for change has also meant that many businesses are adopting the ostrich mentality. For them, the rise is something to worry about towards the end of December and in the meantime it is business as usual. Those businesses are missing out on a great chance to overhaul their processes, suppliers and practices and to come out of the VAT rise not with decreased sales or profits but with a more streamlined, cost efficient fighting fit business ready to take every advantage of the return to growth.
Let’s start with the most obvious result of the VAT change – pricing. With the decrease in VAT to 15% last year and then its reversion to 17.5%, businesses are getting used to the upheaval of the change in rate. However, if the change does cause a lot of extra work, then it is probably time to look at your accounting processes and systems. Changing to an accounting package which helps you to manage VAT changes easily can save you time, costs and accounting staff. In general if you have had the same system in place for the last five years, given the increase in technology over that time you should be able to find a much improved package for a reasonable price.
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Whatever you decide to do with your accounts procedures, make sure that you are ready for the change on 4 January. HMRC will consider that you have had enough notice and will dole out hefty fines for companies who get it wrong.
Now all you have to do is decide if you are going to pass on the VAT increase to your clients or absorb it. Of course, pricing is not just about charging your clients. Now is the time to be talking to your suppliers about whether they are going to be putting their prices up or absorbing the increase. Take the time now to look around and see if you are truly getting the best deal. Are you buying in bulk and tying a lot of capital up in goods which sit around for months before being sold or processed? If so then should you re-consider your business processes to maximise the movement goods and minimise dead stock levels. This is one area where your accountant can really help you to calculate the best deal.
For those businesses running company cars, you have a call to action to consider whether you will be on the best deal come January. The combination of the changes in capital allowances and VAT mean that leasing your company cars may be more attractive. Again, check with your accountant who can advise on the tax implications for your business.
Finally, look at your marketing and sales strategy for the next six months. Do you want to run a pre-Christmas sale? Should you defer bringing in new product lines so that they coincide with the VAT rise?
The rise in VAT is a call to action.
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