When the rate of VAT is changed a huge domino affect happens in your business. All the Sales prices must change and every piece of paper or web page that mentions the price of an item must be changed. Here are some of the areas you need to ensure you take into account when VAT rates change

1. Price lists that show VAT inclusive prices. If the rate changes from 15% to 17.5% you have got to change every price on the price list. If you have a preprinted catalogue price list you need to reprint it.

2. Price lists that show VAT exclusive prices but in the small print is written "price excludes VAT at 15%" the 15% must now be changed to 17.5%

3. Your Sales margins will change if you don't increase your sales price including VAT as you will have to lower your VAT exclusive price to keep the same selling price

4. If you use spreadsheets that specifically have the VAT rate of 15% typed in on every line, you will have to change them all to 17.5%. This might be a good time to change your spreadsheet to use a cell reference and not a specific vat rate

5. Word Processing documents that have "15%" typed on the page. You may have document templates that are all based on 15%. These need to reflect the new 17.5% rate

6. Pricing labels on shelves that display the price and the barcode of a product. Every label that shows a price needs to be changed to reflect the new 17.5% vat rate and reflect the increase in price

7. Pricing stickers stuck to a product have to be changed to reflect any increase in price. If you display both the vat inclusive and exclusive prices then you need to change every label

8. Items that come with the price printed on them or on the tag attached to them. You need to change every price on them

9. Some tills will have to be reprogrammed to take into account the change in the VAT rate.

10. Online catalogues that show VAT inclusive prices need to be changed to reflect the new increased price

11. Direct Debits or standing order payments will have to change to reflect the increased amount due on each invoice

For businesses not registered for VAT your cost price will now go up. Although you don't charge VAT on your sales, you will need to take into account an increase in your costs and decide whether or not to absorb the increase or pass on the cost increase to your customers

 

The effect of a change of rate on an invoice where you do not increase the sales price is as follows

 

31st December 2009 invoice issued

Net £100

Vat@ 15% = £15

Gross £115

 

Same invoice but now issued on 1st January 2010 for £115

Net £97.87

Vat @ 17.5% £17.13

In this case you lose £2.13 or another way to look at it is that you pay over £2.13 more to the tax man

An increase in VAT will be a costly administration exercise for you business as you start to change the selling price of every product affected wherever that price is displayed.