By Claire West

A business support organisation is warning firms that the January VAT rise could leave them with a new year headache if they fail to prepare properly.

All VAT registered traders will be affected by the increase, which will see VAT rise from its current 17.5% rate to 20% at midnight on January 4.

The change only affects items charged at the standard rate of VAT. Goods and services which are zero rated, reduced rated or exempt will be unaffected.

In theory, the change is relatively simple. However, the Forum of Private Business is warning smaller firms that things can easily get complicated when put into practice.

Forum chief executive Phil Orford explained: “Many smaller businesses will have to changes their prices before they start trading on January 4 and this will take a sizeable amount of forethought for retailers with thousands of items in their product ranges. Businesses can of course keep their prices the same and absorb the increase but this will affect their bottom lines.

“However, the main problems businesses are likely to encounter around the VAT rise will be with their accounting systems.

“Firms will need to make sure that their accounting system changes accordingly and is issuing invoices and recording sales and transactions at the new rate from January 4. Any outstanding invoices for work which was genuinely carried out before the date can still be processed at 17.5% so most businesses will probably need to create a new standard VAT code at 20%, but retain a code for the old 17.5% rate.

“Business owners also need to check that everything is at the correct rate when completing their next VAT return.”

Mr Orford added: “The good news is that HMRC says it will be taking a ‘light touch’ in dealing with errors made in the first VAT return after the change if the error relates to the change of rate. If you do, however, realise you’ve made a mistake, you’ll need to issue a credit note and then a new invoice at the correct rate to put things right.”

More information on implementing the increase can also be found via this HMRC guide.

The Forum is advising small businesses to invest in online accounting software in order to make the VAT change process a painless one.

Older desktop accounting programmes often expect the user to update the software to compensate for changes such as the VAT increase.
However, newer online accounting systems usually update themselves automatically, saving business owners time and money.

The Forum has teamed up with Liquid Accounts Ltd, an award-winning market leader in the field, in order to provide its services to members at preferential rates.

The SME-specific software provides small businesses with a simple, flexible and cost-effective way to manage their bookkeeping online, and has been accredited by the Institute of Certified Bookkeepers and the Institute of Chartered Accountants of England and Wales.

Exclusive benefits for Forum members include one month’s free use of the service if they sign up before 1 January 2011. More information can be found under the ‘Finance Director’ section of the Forum’s website —