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The VAT Change: Now The Dust Has Settled, Is Your Business Ready For The New Rate?

London, UK (28/11/2008)

The Pre-budget Report has announced that VAT will be lowered from 17.5% to 15% from the 1st December 2008 but what effect will this have on the small-to-medium sized businesses (SMEs)? The initial reaction is very favourable, anticipating increased spending from consumer’s, therefore increasing business but under further scrutiny it is not as simple as that. The implications of these changes may put SMEs in a tricky predicament.

Firstly, will the SME pass on the reduction in VAT to the customer? A business may decide the price change is not significant enough to enforce, so instead would retain the VAT saving themselves. However not giving the customer a clear price will not encourage them to spend. If the customer is a business and VAT registered then they would be worse off as the cost of the item purchased has increased by 2.5%. This could result in the customer deciding not to buy the item as it no longer represents good value.

If this were to happen, the overall effect of the VAT rate change could have the opposite effect from that intended and the recession could get worse. SME’s must therefore consider very carefully how they action the reduction in VAT to 15%. They must consider the effect on customers that are VAT registered as opposed to customers that are not VAT registered. Mike Simpson, Financial Technical Director at The Local Bookkeeper (TLBK) suggests: “The decision taken may have a serious effect on your future profits and cash flow so you should seek the assistance of a qualified bookkeeper who will be able to help you implement the change to your business.”

Businesses may find customers who are due to pay may try to avoid the higher rate, even though they received your products or services before the change was introduced. For example, if an item or service is priced for £10,000 and was completed ready for invoicing on 30th November, it should attract VAT of £1,750. However, if the SME delays invoicing the item until 1st December, it would attract VAT of only £1,500. It could be difficult to establish a cut-off point for your customers; clients who think they are getting a ‘good deal’ are happier clients which will therefore lead to higher client retention.  This is key for a small business who, without a clear cut-off point, may feel obliged to change the VAT on an invoice for a customer, especially one that brings dependable business to the company.  Mike recommends: “You should seek the assistance of a qualified bookkeeper. They will be able to help you implement the change to your business.”
Even though this is potentially going to stimulate the economy, it also has the possibility to mislead business owners into how much is owed to the VAT office. Without being able to clearly see what they owe, they will not be able to accurately calculate their cash flow, which is the life blood of any business.

The changing of VAT systems of SMEs will be complicated and time-consuming.  Mistakes can easily be made in the confusion of the change, for example knowing which VAT rate to input when creating a credit note. Just to add to the anxiety, in 13 months time when the VAT rate returns to 17.5%, everything must be changed over again. This will be incredibly time-consuming for a business owner and this is time that cannot afford to be wasted. In some cases it will result in complicated software changes that can only be completed by the original installer of the software. Many software consultants are already being inundated by requests to change programs and do not have enough staff to carry out the change for all. A qualified and trustworthy bookkeeper could take care of the change in your VAT system and your software or, if they look after your finances on their office software, this problem would be eradicated for the business owner altogether.

Only adding to the pressure of the rate change, some businesses are entering their busiest time of the year which is not leaving them with a great amount of time to deal with the change-over. SMEs are being left in a state of panic when faced with the prospect of having less than a week to rush through budget changes that they would generally be given months to prepare for.  Whole new arrays of administrative challenges will detract them from the everyday running of the business; These are the last things they need to be dealing with when their full efforts should be applied to their business during the incredibly demanding times they have to contend with. This will only be adding to the immense stress that small businesses are experiencing, in the impossible balancing act of trying to deal with every aspect of their business by themselves. 
Mike continues: “Small businesses should be able to spend their time concentrating on moving themselves forward in their market in the way they know best, instead of having to spend their valuable time buried in their business’s financial systems and software. It is vital that companies have confidence in their systems when they open their doors for business and know they are charging and crediting their customers correctly. Mistakes just aren’t an option when trying to preserve the life of an SME in this economic climate.”

By having the services of a reliable bookkeeper, SMEs can be sure their businesses will be equipped to do nothing but benefit from the VAT change. The worry of the changeover and possible VAT system mistakes will be lifted from the SME, allowing the business owner to take advantage of the VAT change and flourish.
TLBK are happy to offer SMEs one free hour of service to help them change over their VAT systems and assist with any other bookkeeping problems, in order to ease the weight of the emergency VAT cut, from the shoulders of business owners. From the professional support they will receive, SMEs can be confident their systems are correct and their customers will not be subjected to a flawed process. This will give them the opportunity to distance themselves from their rivals as a professional and efficient business, when others may be struggling without qualified help.


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