It was reported this week that the Treasury has agreed to delay the VAT increase by six hours. This is welcome news for businesses that would have previously had to make the change at midnight on New Year’s Eve – especially the pubs, clubs and restaurants that will be open for business. The reprieve also applies to retail and telecommunication businesses that will be operating beyond midnight on 31 December 2009, and although good news, it doesn’t make the admin challenges of the adjustment for small businesses any easier!
Come January, business owners will wake up to the after effects of a 13 month 15% VAT reduction and return to the usual 17.5% rate and as such, have to face the problem of trying to sell products and services at higher prices to customers who are still hesitant to buy.
The VAT reduction came into force in December 2008 to help consumers with the recession. However, the fact is that the UK is still officially in recession and therefore, consumers are not likely to have more cash to splash in 2010 and will not like hiked up prices!
In addition, not only will small companies see an increase in their operating costs, the rise in VAT to 17.5 per cent will also place a huge administrative cost on small businesses – many of which have only just adapted to the original decrease.
As a result many small businesses are now wondering if the 13 months reduction was actually beneficial, and worryingly some businesses may consider absorbing the rate to remain competitive and hold on to valuable customers.
Hopefully, there will be alternative measures put in place to help small businesses, but as it stands business owners will need to plan ahead and ensure they have their books in order to be in the best possible position for the year ahead. Over the next few weeks, businesses that operate good financial management can make the most of the busy Christmas period to bump up sales and create as much profit as possible, future-proofing their business for the months to come.HM Revenue & Customs has further information on how to account for the change in VAT rate.
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