How to prepare for a VAT rate cut

According to MHA MacIntyre Hudson, a rate cut would be a welcome move for certain sectors, which have been hit badly by lockdown restrictions.

“We have recently seen changes to the VAT rate in specific areas of PPE and digital publications,” the company noted in a statement.

“Whilst it would be a popular measure there are difficulties with targeted VAT rate cuts in terms of creating anomalies, unfair competition and compliance difficulties – just getting it right and not falling foul of HMRC’s VAT penalty regime.”

Explaining that the 2008 VAT rate cut caused major implementation issues for all types of businesses, MHA MacIntyre Hudson has urged companies to prepare ahead of time.

What you need to do?

MHA MacIntyre Hudson’s checklist follows:

• Software changes. Can you do this in-house and set up new tax codes or do you need a software provider upgrade? Contact them now and get project management time booked in.
• Prepare in-house invoice templates so that changes can be made to allow a new VAT rate to be charged. This can take up more time than is expected and internal resources will be needed to implement this.
• Book marketing campaigns to coincide with VAT rate cut. Do you have post coronavirus campaigns in the pipeline and bear this potential change in mind.
• If you take deposits – you can choose to use the lower rate if the sale takes place after the change. The option to use the basic tax point is going to be really valuable and important for the motor sector because it will enable deposits to be taken in the knowledge that the new VAT rate will apply to the whole supply as long as the car is delivered after the rate reduction.
• If your business enters into finance agreements, where VAT on monthly payments is set out in advance, you will need to take action to deal with payments due within the VAT rate change period.
• For price tags already on items – stickers are a quick fix to match the item or a VAT discount can be offered at the point of sale at the till.
• Payments on account. The reduced rate of VAT may take you under the POA threshold of £2.3 million or reduce the amount of the payments on account that need to be made. In either case, it is necessary to write to HMRC to request either removal from POA or a reduction in POA payments.
• Cash flow impact. If you are collecting less VAT from your customers as a result of a reduction in the VAT rate, this could potentially have an adverse cash flow impact for your business particularly where you need to fund VAT payments relating to periods prior to the reduced rate applying. It is important to model the cash flow position to allow you to plan accordingly.
• Anti-forestalling measures. Typically, the government introduces measures that come into play when a temporary VAT rate reduction comes to an end. These are generally aimed at preventing artificial arrangements that create a tax point arising while the reduced rate is in place where the supply is made after the rate reduction ends. Keep yourself informed or any such measures to assess the impact that these could have based on your normal business model and trading patterns.