Start planning for the New Year VAT hike or you could risk a hangover that runs well into January.
You don’t need an accountant to tell you that from 4 January 2011 businesses will have to increase the VAT rate they charge their customers to 20%. But what you may need to know is exactly how to prepare for the change so that January 4 passes without any problems.
We’ve prepared a simple 3 point plan to help — plus there’s a detailed analysis of who needs to pay what and when.
1. Raise awareness
Tell your customers exactly what the VAT change will mean as soon as possible to avoid disappointment or misunderstandings. Make it clear that the increase in prices of goods and services is due to the VAT rate change and it is not discretionary. In some cases, it may also be useful to give customers practical examples of what the prices will look like from January 2011.
2. Be prepared
Adapting to the new rate can be a nightmare. There can also be additional confusion where transactions span the VAT change date. Regardless of whether a business uses standard or cash accounting, it is the tax point that determines the rate of standard VAT to be applied. That’s why making a real effort to close invoices and due items by the end of 2010 makes sense. It will really help to streamline the transition.
If you use a software package that automatically calculates the VAT, ensure that the VAT rate is changed from 17.5% to 20% from 4 January 2011. Why not make sure you know how to do this today and if you can’t seek help now so that you’re not caught out in January?
3. Boost sales
On the positive side, the VAT rate change can be used as an incentive for customers to do their shopping before the end of 2010. We are already seeing adverts inviting us to buy now before the VAT rise. Used cleverly in the weeks ahead this rate change can be used as an incentive for customers to do their shopping before the end of 2010. This can be particularly useful for those businesses that find the festive season slower than other periods of the year.”
Exceptions to the rule
Not everyone is clear about how the VAT rules work where invoices are raised or payments are received around that date. The important thing to remember is that it’s the ‘tax point’ that is vital. The ‘basic’ tax point is when the supply of goods or services actually takes place, but the tax point is brought forward if an invoice is issued or payment is received before this date; or it is later if the invoice is issued within 14 days of the basic tax point. Where you provided goods or services before 4 January 2011 and more than 14 days before you issue the VAT invoice, then your sale took place before 4 January 2011 and you should use the old rate of 17.5%. E.g. if you issue a VAT invoice on 4 January 2011 for goods or services provided before 22nd December 2010, or you were paid before 4 January 2011.
For continuous supplies of services, such as ongoing professional or construction services, you should account for the VAT due whenever you issue a VAT invoice or receive payment, whichever is the earlier, i.e. if you issue an invoice or receive payment on or after 4 January 2011 then VAT will be at the new rate of 20%.
Contact us on 0161 832 4451 if you want to talk about these VAT changes.