The rate of VAT in the UK is set to increase to 20% on the 4th January 2011. In these months preceding the rise, VAT-registered businesses are planning for the change. They have to change their accounting systems to deal with the increase but they also have to plan how their business will cope.

As a result, most businesses are actually increasing their prices now as they are worried about the effect of rising inflation. Therefore, they aim for the increase to be absorbed by their customers. A poll was conducted by Kraeb Gavin Anderson on this very issue. They found that around 20% of their respondents said they were planning to pass on some of the increase to customers.

However, all businesses have to be very careful of what action they take due to the anti-forestalling legislation which will be enforced by HM Revenue & Customs. This legislation will effectively block any attempts at planned pre-payments which are against ordinary commercial practices. They will be paying close attention to any firms who charge VAT at 17.5% now for orders or services which will be delivered from 4th January onwards.

Speaking to Contractor UK, accountancy firm MMH partnership commented: “Special scheme [users on the] annual accounting and flat rate schemes must ensure they are aware of how the rate change affects them.” They continued by acknowledging that there were special rules applicable to sales that straddle the change on 4th January and for any supply of services which is continuous. Obviously any business with concerns should seek accountancy advice.

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