How is the VAT Increase Planned for Jan 2011 Going to Affect Your New Business?

05 November 2010

"Tough luck," is basically what Chancellor George Osborne said when the new Value Added Tax (VAT) increase was announced. Come January 4, 2001, the VAT will reach 20% and undoubtedly change the way people do business, even if its only forcing people to pay more attention to their expenses.

The implications for start-up businesses might be a little harsher, however. Its important in any case to examine what this increase means to business and, more importantly, customers.

First up with the possible implications of this increase, lets take a look at how customers might behave due to the new 20% measure going into effect.

Realistically, a 20% increase means that products once costing 117.50 will now cost 120. So, its not that much of a rise when you put it in terms like that. Even still, there's always the possibility that businesses are trending their prices up by a few percentage points to cover their expenses, and that could lead to an even higher increase.

In a recent survey taken, 31% of consumers feel as if the rise in VAT is necessary, so it doesn't appear that so many people are deadest against paying more money for an item. After all, most people are fully immersed in the politics of the modern era, and they know that the Emergency Budget was something done to help in the long run.

Now, whether or not you decide to absorb the increase as a negative or mark up your prices to adjust well, that's solely up to you as a business owner. On one hand, adjusting slightly so you don't lose out over time might be a smart move. Then again, if your competitors aren't adjusting and are offering lower prices, you could find that business is going elsewhere.

Like most things in business, you will have to do a little bit of research here and find out how the market is trending. Depending on what you're selling, speaking in practical terms, absorbing the rise on your end wouldn't be the end of the world so long as you're still selling products at a decent rate.

Of course, some businesses are VAT registered and some aren't. Some will have no option but to absorb more than others. Unregistered companies might be able to find a small advantage by raising their rates slightly. Again, though, it depends on the competition and the overall flow of the market. Each situation will be different.

The most important aspect of the VAT rise is that your business -- especially your website -- needs to be able to adjust the prices when the rise goes into effect. Most sites are going to have some type of software system that does this for them through the e-payment system they're using. Even still, you should check to make sure the rates are adjusted.

Overall, the increase is relatively small and shouldn't impact your business that much. For new businesses, simply be aware that the rates are rising and act accordingly