A number of EU countries have reduced VAT rates in an attempt to stimulate the economy: if VAT rates fall, prices should fall encouraging consumers to spend more.
There has been much press commentary recently that Rishi Sunak will announce a similar reduction in the UK. Note, at present this is pure speculation.
If announced, any reduction will no doubt be for a limited period as the cost in lost tax revenue will be considerable.
However, if and when a reduction is announced what will VAT registered businesses need to do? We have listed below some of the issues that will need to be considered:
If you use bookkeeping software cloud versions may make changes to VAT rates for you. If not, they will presumably provide users with clear instructions. Essentially, from the announced date, the rate of VAT charged on sales will need to be adjusted.
Many businesses invoice for their services by using features in their accounting software. In these cases, the rate of VAT charged from the date any reduction is announced will automatically be applied. Businesses that use other processes to create sales invoices will need to use the amended VAT rate from the appointed day.
Retailers, who normally show VAT inclusive prices on price tags, will have two choices:
- to leave prices at the pre-VAT reduction levels – this will increase their profits on items sold or
- reduce their prices – thereby passing on the VAT reduction to their customers.
The intention of any VAT reduction is to stimulate consumer expenditure and so the preferred option from the government’s point of view is that retailers will reduce their prices for goods subject to a VAT charge.
If your business has subscribers, members or any other model that charges for services on a fixed monthly basis, presumably customers will expect any VAT reductions to be passed on their periodic payments reduced accordingly.
Aside from the changes to invoicing, affected businesses that have set up standing order arrangements may face a challenging conundrum. They will need to contact each customer and ask them to reduce their standing order payments.
An option that affected businesses could consider is switching from standing order payment to direct debit. There are a number of cloud based direct debit facilitators that could be considered.
We can help
If rates are reduced for a limited period we can help you devise a strategy to cope with any changes to your pricing or admin systems.