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November 25, 2008updated 19 Aug 2016 10:07am

Chancellor throws business IT into disarray with VAT rate cut

With news in the pre-budget report that the Chancellor is slashing VAT from 17.5% to 15% from Monday, many businesses will be struggling to get their IT systems updated in time.Since the rate of VAT changes so infrequently, many smaller firms have

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With news in the pre-budget report that the Chancellor is slashing VAT from 17.5% to 15% from Monday, many businesses will be struggling to get their IT systems updated in time.

Since the rate of VAT changes so infrequently, many smaller firms have hard-coded the rate of 17.5% into their application logic. Refactoring those systems to calculate VAT at 15% may not be such an easy task, especially for companies that lack in-house IT skills.

Ewen Ferguson, associate director at Protiviti, noted: “While the VAT reduction will be welcomed by many in the business community, for some organisations it will be a lot more difficult to implement than people initially think. Even just scoping the impact of the change could be tricky. Many IT systems, and particularly spreadsheets, contain the 17.5% VAT rate ‘hard-coded’ into them within numerous calculations. To check and amend every system and spreadsheet could be a massive and expensive task, and may cause an unforeseen impact to year to date data.”

Protiviti, a provider of risk consulting and internal audit services, warned that companies could face complexities and errors. There is a range of considerations, including supply chain, accounting timings of purchases and sales, decisions on pricing of goods, and invoicing, aside from the related IT issues.

For some organisations, making the change centrally will be quite straight forward, however for many it will not be as simple as changing a single rate. There is a range of considerations, including supply chain, accounting timings of purchases and sales, decisions on pricing of goods, and invoicing, aside from the related IT issues.

CODA, supplier of finance systems to 25% of the UK high street, warned of the confusion the cut in VAT will cause not just to retailers, but potentially also to consumers in the run-up to Christmas.

Following discussions with its retail customers about implementing the 2.5% cut in VAT, CODA found that many believe it will cause more problems than it solves at a time when they are already discounting heavily…[click continue reading for more on this entry]…

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Among the concerns cited to CODA were:

– Risk of IT problems by overriding the pre-Christmas systems lock-down

– The time and cost associated with changing price tags

– Communicating price changes and setting a round number price point

– Handling customer refunds

“It is clear from talking to our customers that many are unprepared for this change which comes into effect from Monday,” said David Turner, group marketing director at CODA. “They usually have months to prepare for this kind of thing and test the associated systems, but introducing it at this time of year will cause a huge amount of confusion. Retailers generally ‘lock-down’ their systems in the run up to Christmas, to avoid the risk of IT failures in their busiest trading period. Although the VAT changes are simple enough to make within the accounting system, there are other complications.”

“Retailers like neat price points – £1.99 or £24.99, for instance,” said Turner. “But take off 2.5% and you get odd numbers like £1.94 or £24.37. They will need to decide whether they round prices up or down – or even if they actually will pass on the savings to the consumer. And they will have to account for the changes at the point of sale while ensuring the consumer is clear about how much an item costs. Retailers we spoke to were unanimous when they said it would take them some time to reflect the changes on price tags of current stock.”

Many retailers planning to reflect the cut on current items said that the best they could do would be to produce generic ‘price converter’ posters showing how the VAT drop affected different prices, while reflecting the actual change through the central computer systems at the till. Many felt that they wouldn’t be able to change price tags until early next year or until they were ready to introduce new stock to their stores.

“Retailers in very seasonal areas like shoes told us they may have to wait until the next season’s stock comes in, early next year, before changing prices at all,” said Turner. “This change comes just as many UK retailers have implemented changes for Ireland, which changes its VAT from 20 to 20.5% next week. It’s looking like a change too far and Darling has made it clear that the changes will only last until the end of next year.”

Commentators also lined up to argue that the VAT rate cut may be a step in the right direction, it does not do enough for businesses or indeed for consumer demand. David Coats, associate director of policy at The Work Foundation, said: “While the VAT cut is welcome, it is not the best targeted measure and will only indirectly increase the purchasing power of consumers. There are better ways of boosting demand: our preference was for a one-off tax credit to put more money into the pockets of those most likely to spend it.”

Meanwhile salesforce.com’s Woodson Martin, VP strategy, argued that small businesses have been, “thrown a bone, not a lifeline.”

“Money is important,” Martin said, “but if you scratch beneath the surface it often isn’t what’s really needed, particularly in small businesses. The government should be investing in education programmes to help small businesses work more effectively with the resources they have available.”

Cue segue into the value of Software as a Service and cloud computing. “Cloud computing gets the management overhead off site, hands maintenance to experts and reduces cost of ownership,” said Martin, “meaning SMEs will be able to focus on their core business. Cloud computing applications can also be up and running in minutes, hours or days to react to the kinds of swings we’re going to see in these uncertain economic times.”

Finally, Protiviti warned that companies face the added burden of having to make this change to their IT systems in the middle of the tax year. Making a change in one place could cause an unpredicted impact on year to date figures, while retailers in particular face a race against time to get their systems in order in the run up to Christmas following the change. Companies need to quickly set up a project team to assess and deal with the impact of the change, Protiviti urged.

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