Looming VAT rise compels firms to act

It is not just their accounting systems that VAT-registered businesses are beginning to change in advance of the headline rate of the tax increasing from January 4th 2011.

Concerned about rising inflation, big businesses affected by the change are putting up their prices now, indicating little faith in their margins to absorb the increase.

In fact, faced with the 2.5 per cent rise, the majority of big-name retailers say they will pass most of the extra cost on to the customer, by raising prices this month.

Almost a fifth of the respondents to pollsters Kraeb Gavin Anderson were more cautious, saying they would pass on only a fraction of the rise, the Times reported.

But to prevent all VAT-registered firms from unfairly reducing the bigger VAT burden, advisors warn that the taxman will be ready with anti-forestalling legislation.

Promised by HM Revenue & Customs, the regulations are designed to block any prepayment planning arrangement which does not meet normal commercial practices.

Most obviously, the rules will target firms that seek to use the current 17.5 per cent rate for supplies of services to be delivered or performed on or after January 4th.

"Special scheme [users on the] annual accounting and flat rate schemes must ensure they are aware of how the rate change affects them," said the MMH Partnership.

The accountant also pointed to new rules for sales that span the rate change and for the continuous supplies of services, as well as for deposits received before January 4th for sales made after the date.