The increase in VAT is scheduled for 4 January 2011, it’s going up from 17.5% to 20%. Of course if every business was registered for VAT this would create no problems as every trader would have to add on the same amount of VAT.
Val Vince, VAT Consultant at Accountants, Armstrong Watson, explains:
“If your business turns over less than £70,000 a year you do not have to register and if you don’t register you can charge £100 that a VAT registered person would have to charge £120 for - after 4 January 2011. There are complications if you don’t register as you can’t reclaim VAT on your purchases.
“Nevertheless we would expect smaller service related businesses with a low cost base to make the most of their increased competitive advantage in 2011.
“To add to VAT registered traders’ problems, from April next year the penalty you will be charged for late filing or late payment of VAT returns is also on the increase!
“When returns are late, normally payments will be late too, as the trader will not know how much to pay unless the return has been prepared, so potentially there will be two penalties for each late return – one for the late filing and one for the late payment.
“The first late return under the new legislation will attract a fixed penalty of £100; this is a significant contrast to the current regime where the first late return is not penalised at all. Subsequent late filing can increase these charges significantly.
“If you are late paying any VAT due the penalty charged will be between 2% and 5% of the VAT due, the percentage increasing with each subsequent late payment.
“It makes sense to get your VAT returns filed on time even if you have to negotiate payment terms.”