Companies in the Midlands should be taking steps now to ensure their profits are not impacted unnecessarily by the planned VAT increase on 4 January 2011, according to experts.
The VAT increase will affect all businesses, but it is suppliers working with organisations such as banks, charities and the education and healthcare sectors, that are likely to come under the most pressure when passing on the increased VAT rate to their customers.
Most companies can claim back any VAT they are charged when doing business. However, certain organisations cannot claim back all the VAT they incur and for them, the planned 2.5 per cent uplift represents a significant increase in costs.
This will also impact on suppliers who have little or no flexibility over price or who have agreed VAT inclusive prices with their customers before the VAT rate increase was announced.
Paul Jackson, tax director at PricewaterhouseCoopers in the Midlands, said: “To a company that is not fully taxable, such as a bank or charity, the rate increase is effectively a 2.5 per cent surcharge on the cost of goods and services as they cannot claim this money back.
“Suppliers working with these organisations may find it difficult to re-negotiate terms if they agreed a VAT inclusive price prior to the VAT rate increase being announced.”
Mr Jackson said firms need to revaluate their cost base now in order to maintain profits when the increase is enforced.