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VAT rise splits business response

9th December 2010

There is a mix of strategies among business for dealing with the hike in VAT that is due to take effect as from 4 January next year.

The standard rate of VAT is set to climb from 17.5 per cent to 20 per cent.

But a survey conducted by the Institute of Chartered Accountants in England and Wales (ICAEW) has found that businesses have a variety of planned responses.

According to the survey of those firms affected by the increase, 36 per cent will be absorbing the extra costs themselves.

Another third (30 per cent) will be upping their prices to accommodate the increase, while a further third (34 per cent) will be implementing a combined approach, with some costs passed on and some costs absorbed.

Some 60 per cent firms believe that the increase will have some impact on their cashflow; almost one in ten (9 per cent) think that the effect will be significant.

The survey also revealed that the changes to VAT over the past couple of years, during which time it has dropped to 15 per cent, risen back to 17.5 per cent and now is to rise to 20 per cent, have created an extra administrative burden for firms. A third (33 per cent) described VAT as the most burdensome task, second to dealing with the payroll (50 per cent).

Frank Haskew, head of tax at the ICAEW, said: "At a time when companies are facing a tough 2011, having to change the VAT rate is not a good way to start the New Year. Many will be worried about the effect it will have on sales in the first quarter but preparation is the key to help ensure the transition is smooth."