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The VAT increase is near but are contractor accountants’ clients prepared?

The VAT increase is near but are contractor accountants’ clients prepared?

Although UK businesses have had plenty of warning that VAT will increase to 20% at the beginning of January, almost 20% of small businesses are still not prepared.

Business software provider, Sage, conducted a survey of 1,500 SMEs and discovered that 11% have not even thought about the increase and another 7% are worried that they have not done enough to prepare for the change.

This change will not necessarily be as daunting a task as it was previously. We’ve had two changes in the last couple of years, so it’s not as if contractor accountants and businesses are faced with a completely new phenomenon. Small firms will have to decide whether to pass on all or some of the increase to their customers, or absorb the full amount themselves.

The other problem for businesses this time around is that the increase does not take place on the first of a month. Therefore some firms will need to complete VAT returns showing two different standard VAT rates. If business owners are in any way unsure of how to proceed, they should contact a contractor accountant for advice.

Meanwhile, third-sector employers who are not registered for VAT could find January’s increase represents a commercial nightmare, according to the MD of Cash Simply, David Thornhill.

The standard rate of VAT will rise to 20% as from the 4th of January next year and the Charity Tax Group estimates that this will increase costs for the third sector by an extra £140 million.

Employment businesses must charge VAT on the wages of the workers they supply. Businesses that are registered for VAT claim this back as input tax on the VAT returns, but charities are not VAT registered and therefore they cannot reclaim this cost.

However, there is a way around this problem, Thornhill explains. If a temporary worker was to be engaged on a short-term contract and the charity outsourced the payroll processing to an independent payroll company that also funded the wages, invoiced them separately and was effectively the charity’s PAYE agent, the unrecoverable VAT would be removed from their costs.

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Image: Christmas To Do List by Jon Curnow

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