How To Cope With The VAT 'Nightmare Before Christmas'.
The recently announced VAT rate reduction couldn’t have come at a worst time for UK VAT registered businesses, the benefits in the short term are negligible, but set during the peak pre-Christmas business activity a bureaucratic administrative burden is virtually guaranteed. The last main VAT rate change was way back in 1991, and many systems, routines, and computer programs have been set at 17.5 percent with little experience on the practicalities of changing the VAT rate. Datalite UK Ltd passes on some thoughts and suggestions on how businesses can cope.
Datalite UK Ltd’s last article was titled ‘Whom Is The Biggest Enemy of UK Businesses?’ The answer was concluded as the current UK government, and indeed recent events have reinforced this view with the recent announcement of a VAT change and all the bureaucracy that involves, effective 1st December 2008, right at the busiest time for most businesses! This article aims to provide some helpful tips, but first some background.
Value Added Tax is in effect a tax on most items purchased, using money which invariably has already been taxed or come from tax. Members of the European Union are required to impose a tax on most purchases, which includes such ‘luxury’ goods and services as adult clothes, insurance, hot food, and sanitary towels to name but a few. It is an incredibly inefficient tax, which is passed from company to company throughout the production chain, with VAT businesses claiming back VAT expenditure and paying VAT charged. No sane business plan would come up with such a bureaucratic system, but the European Union have, leaving businesses to deal with the administrative burden.
Currently the world is entering a global recession, which is proving something of a culture shock for many governments. The current UK government's answer to the recession is to throw lots and lots of money at the problem and to borrow on an unprecedented scale – time will tell whether this will work or not. Part of this strategy to ‘kick start the economy’ was announced on 24th November 2008, a decision to lower the rate of Value Added Tax from 17.5 percent to 15 percent with effect from 1st December 2008.
This couldn’t have come at a worst time for UK businesses, the benefits in the short term are negligible, but the effective date falls precisely at the time of peak pre-Christmas retail activity. The last main VAT rate change was way back in 1991, and many systems, routines, and computer programs have been set at 17.5 percent with little experience on the practicalities of changing the VAT rate. The scenario presented has major impact on all UK’s VAT businesses with potential of the ultimate ‘Nightmare Before Christmas’.
This article provides some thoughts on how to successfully achieve a global VAT rate change. The first thing for a business is to determine is whether their prime price driver is Gross or Net price?
Businesses that use a Net price are primarily suppliers of goods and services to other VAT businesses. As VAT is reclaimable, their customers are mainly interested in the Net price. The VAT change is relatively easy to achieve, as the core price remains the same. All that is needed is to change the means of calculating the VAT to 15 percent rather than 17.5 percent with effect from the 1st December 2008. For web orientated businesses using a shopping cart this may simply be a case of changing the VAT rate in the cart setting. Manual calculations just need to be adjusted accordingly. A more complex scenario is for a dedicated computer program calculating prices either online or driving cash registers, this may need expert assistance.
Conversely businesses that use an advertised gross price face potentially the most complex tasking. This includes the majority of retail outlets both run from physical shops and online stores. The dilemma is whether to pass the VAT reduction on to customers or not. The current UK government would like the saving passed on, but this is not mandatory. This is a decision for individual businesses; but the logistics of global price changing, re-labelling, or mass price changes on a large retail website may veer towards keeping prices as they are, at least in the short term. This at least simplifies the task to changing the underlying calculation to derive a revised Net amount. Incidentally the multiplier to derive VAT from the gross price is the fraction 3/23 (not 15 percent or the former 7/47).
If a global price change is a must, to reflect the lower rate of VAT, global replacement techniques may be utilised for websites and underlying computer programs. The trick is to start at the highest price first and globally replace down to the lowest figure – this assumes that the same profit multiplier is used throughout.
For all VAT businesses, stationery or signs that quote 17.5 percent need to be changed to the revised 15 percent rate. This needs to be achieved on the 1st December 2008, as unless announcements are made otherwise, it would be breaking VAT laws to quote the wrong VAT rate, even given the ridiculous short notice. Signs can be quickly amended with a marker pen or cover label; and stationery can be amended on a next use basis.
The above tips are intended as an unofficial guide; none of the above advice is intended to replace the guidance and requirements of the VAT Section of HM Revenue and Customs or government legislation.
To conclude, the final and probably most important tip of all is to fully document businesses ‘lessons learnt’ from the overall evolution ready for the next VAT change, due 1st January 2010 if not before.
For further information on this article see http://www.dluk.info/uk-business-vat-rate-change-nightmare.html