Prepare for the VAT Rise

As of January 4^th 2011, VAT will rise from 17.5% to 20%, bringing the UK in line with other major European nations such as France and Italy. Although businesses up and down the country will be bracing themselves for the effects to hit, what are you actually going to do to combat it? Has your business tweaked its plans and budget to help deal with the rise?

Most businesses might be wondering what this VAT increase will actually mean and what the options are. Consider the following ideas:

Let the Business Bear the Brunt

One option is to let your business shoulder the rise in VAT. By doing so, it is imperative that marketing and sales focus is increased so that the rise does not result in your business losing money. If you decide to take this option it is probably a good idea to contact a professional bookkeeper so they can go over your accounts and work out what level of sales increase is needed to cover the VAT rise.

Pass the Rise onto Customers

If it costs more to run your business as a result of increased VAT charges you may consider passing the rise onto your customers. Nobody likes to do this, especially if you have a number of loyal customers, but it may be necessary in the long run. You may be able to swallow the VAT rises for a year or two, but the pressure to do so year after year may be too much for many businesses. Management accounts are often the speciality of local bookkeepers so invest in their services to ensure all accounts are totally accurate throughout the year and that your business does not lose any profit made to tax at the end of the year.

There are contradictory claims in the business world presently as to what the best option is to take. Whatever you decide, remember to get your numbers and calculations right with the help of a bookkeeper. Do not underestimate the effect this rise could have on your business and your customers.

Know the Rules on VAT Filing

From this April, if at or since 31 December 2009, your business turnover for the previous 12 months was more than £100,000, or you are newly registering for VAT, you have to file your returns online and pay electronically. HMRC is phasing out paper returns and this will eventually apply to all businesses, so even if you’ve already registered but don’t reach the £100K threshold, it is a good idea to go electronic if you can. Paying via an online direct debit actually gives you more time to pay than making payments by any other method.

The standard VAT periods are quarterly, with returns and payments due by the end of the following month. If you file online, when you have a VAT payment to make, you have an extra seven days to file your return. If your payment choice is by direct debit, HMRC will take your amount three days later, giving you the possibility of an extra 10 days for the amount to be earning interest for you.

Remember though, that if you are making a nil return or require a repayment, you don’t have the extra seven days to file. HMRC are not likely to make the £100 or more surcharge in such circumstances, but you will probably receive a warning notice and lose brownie points.

Other VAT schemes are available to small businesses. Under the Cash Accounting VAT Scheme, you only have to report actual payments from customers, instead of the amounts on the invoices you send out. Under the Annual Accounting Scheme, you have to estimate the amount of VAT you will owe for the year and make regular prepayments. At the end of your accounting year, you must file an accurate return and pay the balance due or claim a repayment at that time.

Whatever arrangement you have with HMRC, make sure you always file your returns and make your payments on time, so you avoid paying any surcharges and interest.

Lynn Watson is the Director of Office Assistants, a company certified by the Institute of Certified Bookkeepers. They offer small to medium businesses of all types the chance to cherry pick from a flexible range of services including bookkeeping; VAT; Payroll; CIS returns and general office services. The company has 20 years experience and pure expertise in streamlining systems and making substantial savings for all types of Essex and London businesses from sole traders upwards. For more information visit http://www.officeassistants.org/