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The VAT Reduction
It could be a bigger problem for UK business than the millennium bug

The government is on the brink of announcing a cut in the UK rate of VAT from 17.5% to 15% - a move designed to have a profound effect on the whole UK economy. Unfortunately the effect may be profound – but not the desired one. It could in fact lead to the closure and failure of a large number of businesses – and a period of severe disruption in the trading for other businesses.

What may you ask is the issue? The Government appear to have overlooked one key fact – the cost and logistics of the implementation of this VAT cut. For as long as many people can remember the general rate of VAT in the UK has been 17.5%. This figure is used in calculations throughout accounting systems, on stationary and invoices and on till receipts and point of sale devices.

Some of the costs involved with the change are relatively minor – this includes re-programming of millions of point of sales devices from supermarket tills to the local corner shop. Some businesses may also have to also have to re-print their stationary. Clearly millions of spreadsheets that do VAT calculations will also need some rework.

A far more fundamental and costly issue is accounting and billing systems. As the rate of VAT has been stable for so long many computer systems – probably numerically the majority - have taken the approach that the number is a simple constant. In some cases it is a hard coded figure – in others it is a global constant for a system. It is only in some of the larger commercial systems that VAT is treated in a way that allows two different VAT rates in the same financial year. This means that core accounting and billing systems may need fundamental and extensive changes to allow for the new VAT rate. The changes could take weeks or months to implement and without these changes companies may be unable to trade as they will be unable to raise correct invoices.

Another issue that may not have been thought through is the impact on small businesses that are not VAT registered. It is likely that they will have brought stock at 17.5% VAT – and will be selling in a market with 15% VAT. Unless steps are taken to refund this 2.5% difference they could be put at a great disadvantage – with up to  2% reduction in margins compared with VAT registered companies.

Clearly something needs to be done to help the economy – but the impact of implementing the change needs to be taken into account. Reductions in national insurance or income tax would be far easier to implement – and could be targeted better. Other options would be to reduce council tax by raising the central government contribution.


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