The Budget in December 2009 has resulted in the high rate of VAT currently at 21.5% being brought back to 21%. The 21.5% vat rate has been in place for 13 months where before that it was 21%.

The change on the 1^st December 2008 brought with it many headaches for bookkeepers. Not only did it require that the those businesses where the 21% VAT rate was there main vat rate mean that the default vat rate for every product and customer be changed, along with any outstanding sales orders and purchase orders, it was the middle of the Vat period of Nov/Dec’08 which made administrating it more difficult.

Accounting software in some cases also had to be upgraded as it could not handle the change in the VAT rate. This alone cost businesses a lot of money.

BUDGET 2010 – What we learnt from Budget 2009

What we learnt from our previous experience of changing the VAT rate is that it can be done. It is inconvenient, but the tools are out there now.

Some of the mistakes people made were as follows;

Budget 2009 Mistake 1.
Simply changing the VAT code that was 21% to 21.5%.
Problem:
 If you went to reprint a sales invoice it recalculated the VAT rate at 21.5% instead of the 21% it originally was calculated at.
Vat Reports were incorrect as no reports could no be run for Vat at 21% as it was now 21.5%
Solution:

Set up a new rate of 21.5% and leave 21% where it is.
Budget 2010 Solution
Do not change the 21.5% code to 21%. If you have a 21% rate already setup use that instead

Budget 2009 Mistake 2.
Forgetting to change the VAT rate on Sales Orders and Purchase Orders raised on sates before the new VAT rates took effect or vat rates on delivery dockets not yet invoiced.
Solution:
Go back and change all Sales Orders and Purchase Orders and delivery dockets to ensure that the new VAT rate will be used
Budget 2010 Solution
Check that all Sales Orders and Purchase Orders that and delivery dockets that will be processed with a 2010 date have the new vat rate of 21% and not the old vat rate of 21.5%

Budget 2009 Mistake 3.
Not changing the default VAT rate for customers, suppliers and stock codes. So when new transactions were processed the kept defaulting back to the old VAT rate and this meant that the VAT calculated was wrong.
Solution:
Change all the defaults to the new Vat rate
Budget 2010 solution
Change the default for all suppliers, customers and stock codes to 21%

BUDGET 2010 The effects of a business

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 21.5% to 21% 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 21.5%" the 21.5% must now be changed to 21%

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

4. If you use spreadsheets that specifically have the VAT rate of 21.5% typed in on every line, you will have to change them all to 21%. 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 "21.5%" typed on the page. You may have document templates that are all based on 21.5%. These need to reflect the new 21% 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 21% 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 deceases in 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 down. Although you don't charge VAT on your sales, you will need to take into account a decrease in your costs and decide whether or not to keep the increase or pass on the cost decrease to your customers

Here is the correct method for dealing with the new VAT changes on a cash receipts basis.

IMPORTANT: It used to be that when VAT rate changed and you were on a cash receipts basis you paid the VAT to the revenue commissioners on the VAT rate applicable on that date and not at the rate the invoice was raised at. This is no longer the case. When you receive payment you calculate VAT at the rate charged on the invoice. This may be an administration nightmare for some people as you have to identify on every receipt what rate was charges. If you have slow payers you could have 21% and 21.5% rates having to be calculated.

The revenue commissioners have more information on the vat rate changes on their website for which the link is below

http://www.revenue.ie/en/tax/vat/leaflets/vat-rate-change.html