How to deal with a change in the 21% VAT rate
It had been pre-announced that in the Budget for 2012 to be announced on the 5th and 6th December 2011, that the 21% VAT rate will be increased to 23%. Businesses need to prepare now for these changes.
A change in VAT rates happened in on 1st December 2008 when the 21% rate changed to 21.5% and then on 1st January 2010 it was reduced back down again to 21%. And in 2011 some 13.5% VAT rate items were change to 9%, so many businesses have experienced a change in VAT rates.
What are your options
All vat inclusive prices prices go up 2% but there is no increase in your sales margin or
Keep prices as they are and absorb the vat increase, which reduces your sales margin by 1.626%. So for every €100 you lose €1.62 cent of your profit margin
Administration
Cash Account Basis for VAT, must breakdown receipts between what was invoiced at 21% and what was invoiced at 23%
How will you deal with
Credit Notes issued at 21%
Preprinted Sales Invoices showing including VAT at 21%
Any reference to excluding VAT at 21% or including VAT at 21%
Changing Price Tags, Shelf Price Tags, Preprinted packaging with prices
Price Lists showing VAT inclusive prices
If you are open 24 hours a day, it is going to be challenging to have all your systems ready in time. The 31st December 2011 is a Saturday and the 1st January 2012 is a Sunday.
Manual Bookkeeping System
You will need an extra VAT column in purchases daybook
Bank receipts book need extra column to breakdown vat between 21% and 23% if using the cash accounting basis
Computer Systems
Do not change the VAT sales code that is 21% to 23% as this will affect all previously sales issued invoices that were issued at 21%. If you try and reprint old invoices they will recalculate and display the VAT at 23%
More importantly, if you want to reprint VAT reports they wont make sense as you will no longer have a 21% vat rate to report on as you will have changed it to 23%.
You must set up a new Sales VAT code at 23%
Do not change the VAT purchases codes that are 21% resale and non resale to 23% as this will affect all previously recorded purchase invoices that were recorded at 21%
You must set up a new Purchases VAT code Resale at 23% and Non Resale at 23%
If you have default VAT codes of 21% set up on Customers accounts or Supplier Accounts you need to change these to 23%
If 21% VAT codes are attached to products you need to change the VAT rate attached to those product codes to 23%
Other Effects
If you import goods from outside the EU and pay VAT at point of entry, your VAT at point of entry amount will also go up by 2%. This will affect your cashflow.
You inflow of cash from customers should increase which looks good, but your VAT Return liability will also be higher. You may need to adjust your direct debit to the revenue commissioners if you are on the annual VAT scheme.
If you are not VAT registered your costs will now increase on everything that was billed to you at 21% e.g. Stationery and rent, all these costs go up by 2%
Direct Debits or Standing Orders may have to be adjusted to reflect the new increase in the VAT rate, as the repayment amount will have gone up.
If you are selling to non vat registered consumers in the EU and are currently charging 21% VAT, you now have to charge 23% which makes you less competitive
Northern Ireland
The VAT rate in Northern Ireland in currently 20% and in the Republic of Ireland it is 21%. A 1% difference was not noticeable. this will now become a 3% difference and many border county businesses in the Republic of Ireland will find themselves at a disadvantage when pricing against businesses in Northern Ireland.
Items charged at 0%, 9%, 13.5% are not affected.
So start planning now and carefully check how you will be affected by this change and have your systems ready and in place to deal with these changes. Talk with your accountant and you accounts software support company to make sure you do everything right for the change over.
