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Avoid the Triple Effect of the VAT rise

By the time you read this, the Government will have implemented the rise in VAT from 17.5% to 20%, but many of you will still be struggling with some of its implications. Announced in the Chancellor George Osbourne’s Budget, the rise on 4th January 2011 represents one of his key policy changes introduced to try to reduce the country’s budget deficit. This contrasts sharply with the previous Government’s policy to reduce VAT to 15% for a limited period, to stimulate growth; in other words asking consumers to buy their way out of recession. While this turnaround has forced many organisations to rethink marketing and policy strategy – the good news for the finance and AP departments is that this latest VAT change (the third over a period of 26 months) has meant that many organisations feel that they are well versed in how to cope.


However, this VAT change has additional consequences. Unlike the previous rate changes, the Government has remained silent about how long this 20% rise will last. Therefore, it’s safe to assume that it’s here to stay. In fact the Treasury estimates that this rise will generate an additional £65bn over the next 5 years.


On a purely corporate level, consumer businesses will have to decide who will bear the brunt of the extra 2.5% - the consumer, themselves – or a mix of the two. The Office for Budget Responsibility says:


“Firms are expected to absorb some of the rise in VAT through lower profit margins and not to pass through the full increase to consumers.”

 

It’s likely however that the split will be somewhere in the region of 25:75 – the 75% being carried by the consumer. Regardless of how individual organisations determine their strategy – one thing is clear – they will need to mitigate the effect of the VAT rise in both areas of their business.

 

One area that economists and other policy drivers haven’t covered in much detail is the impact of the VAT increase on areas of business responsible for the ongoing administration of the changes. The effect of the VAT increase on businesses is a potential nightmare if companies are not prepared with the right processes. Nowhere is this truer than for people in finance and accounts payable teams. Without doubt, the VAT changes will lead to an increase in invoicing mistakes which will take time and vital resource to put right, including the cost of the delay in supplier/consumer payments.  In the immediate aftermath of this latest rise, the question many organisations will be asking is:


Were we properly prepared?

  • Did we accommodate for invoices spanning 4 January 2011
  • Did we calculate the likely effects on corporate liquidity?
  • Did we have a plan to minimise the error risk?
  • Should we have automated some VAT reporting processes?

If the answer in general is no, we weren’t properly prepared, in most cases it’s not too late to do something about it. On a practical and preventative level, there are steps that companies can take to help mitigate the administrative effects of the rise. By far the simplest and most effective long-term solution is to use software that checks for errors, including VAT errors in payments. Many finance departments who are running best-in-class AP teams have already put these kinds of preventative measures in place and are routinely making dramatic savings for their organisation.


The beginning of the year has traditionally been one of review and planning – and the VAT increase may provide organisations with the extra impetus they need in order to review current procedures and find new ways in which to manage cash flow, including some elements of AP automation. Without this approach it’s easy to see how an organisation could quickly fall victim to a triple whammy from the 20% rate rise. A narrowing of profit margins, a potential downturn in overall trade caused by higher prices, compounded with inefficient AP processes could have disastrous effects for business in 2011. Whilst automation itself cannot be expected to provide all the answers, a reduction in manual interventions and a focus on buying the correct AP software for an organisation can have dramatic effects both in providing genuine value to an organisation’s bottom line, and in reducing errors and overpayments.

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