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Businesses urged to prepare for VAT rise


Businesses are being urged to prepare for January’s increase in Value Added Tax (VAT) or risk encountering problems when the rate changes.


The Forum of Private Business (FPB) is advising small firms to make the necessary preparations ahead of the rise. It warns that while the change is, in theory, relatively simple, things can easily get complicated when small firms put it into practice.


As announced in the Emergency Budget in June, the standard rate of VAT is due to rise from 17.5% to 20% on 4 January 2011.


Commenting, the FPB’s Chief Executive, Phil Orford, said: ‘Many smaller businesses will have to change their prices before they start trading on  4 January and this will take a sizeable amount of forethought for retailers with thousands of items in their product ranges.


‘Businesses can of course keep their prices the same and absorb the increase but this will affect their bottom lines. However, the main problems businesses are likely to encounter around the VAT rise will be with their accounting systems.’


For any supplies of standard-rated goods or services that take place on or after 4 January 2011 businesses should charge VAT at the new rate of 20%. Consequently, firms currently calculating their VAT using the VAT fraction of 7/47 should use the new fraction of 1/6 from 4 January 2011.


Zero-rated supplies, such as basic foodstuffs, children’s clothing and books; exempt supplies, such as education and health; and supplies subject to VAT at the reduced 5% rate, such as domestic fuel and power, are not affected by the change.


Anti-forestalling legislation has been introduced to prevent the 17.5% rate applying to supplies of goods or services that are provided on or after 4 January 2011.


Earlier this month, Chancellor George Osborne signalled that the 20% rate of VAT will be a permanent increase.


If you have any questions about the VAT rise, please do not hesitate to contact us.