Depending on which accounts software you use, you may have setup the following defaults
1. A default VAT rate for each customer
2. A default VAT rate for each supplier
3. A default VAT rate on each product
So you think, change the current 21% VAT rate code to 21.5% and all these defaults are automatially updated i.e. I don't have to make any changes to the defaults because I changed the master default rate from 21% to 21.5%. so automatically each default VAT rate is changed.
But what if you need to reprint an old invoice. The VAT code on this invoice that was 21% now says 21.5% because you changed the master VAT code and all the historical invoices are linked to that vat code. It's similar to deleting a product and now it wont appear on an old invoice.
Also, what about your VAT reports. You no longer have a 21% VAT rate report. If you run it now its says 21.5% and all the old transactions will throw up errors as they don't calculate to 21.5%.
What to do!
You need to get your software provider to do the following
1. Change the 21% VAT rate to 21.5%
2. Set up a new VAT rate code for the old 21% VAT rate
3. Have all the old 21% rate transactions (new 21.5% rate) changed to the new 21% vat rate code
Example
Old VAT rate 1 = 21%
VAT rate 1 changed to 21.5% (was 21%)
New VAT rate code 4 setup as 21% (to deal with all the old transactions)
This method means that you wont have to change any of the customer, supplier or product default VAT rate codes attached to each of them. Also it means that all your historical transactions will have 21% (VAT code 4) attached to them.
You can also deal with suppliers who send in late purchase invoices still charging 21% because you have a 21% rate and a 21.5% VAT rate.
You outstanding Sales Order and Purchase Orders will also now be dealt with. Because you will have placed purchase orders at 21%, you need to change them to 21.5% to match your suppliers invoices that will charge 21.5%. More importantly all your Sales Orders that have 21% attached to them will now have the correct 21.5% rate calculated on them. This will ensure you don't charge the wrong VAT rate.
Remember if you have a deposit from a customer of say 25% for a sales order and the VAT rate now increases, the balance of 75% is no longer 75%.
If you are absorbing the VAT increase i.e your selling price including VAT is not changing, you either have to change the price before VAT and add 21.5% VAT to bring the selling price up to the current list price. Or charge the customer at 21.5%, but give them a discount to bring them back to your list price before the VAT changes.
Think deeply about how this 21.5% will affect every part of your business.
Your Sales to Customers
Your Purchase from Suppliers
Your stock items
List Prices and Price Lists
Your Sales Orders
Your Purchase Orders
Your Sales Margins
If you mess around with your computer system, you could end up with a serious mess. With this change in VAT starting 1 month before the busiest period of the year, you can't afford to get it wrong. Talk with your accountant and with your software support department before you start changing anything.
