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Value Added Tax is set to rise to 20 percent from 4th January 2011, affecting the majority of businesses. HM Revenue & Customs are encouraging businesses to make plans for the increase now in order to cope with the effects. Many businesses are planning to absorb the cost themselves ensuring that customers don’t have to pay extra for their purchases. However, suppliers are already passing on the increase in VAT in some cases, raising costs for already struggling businesses.

There are different rules for the application of VAT and an accountancy firm will ensure that you apply the correct rates. For instance, businesses that issue VAT invoices after the 4th January 2011 should include the new rate. However, if the sales span the change in VAT rate, there are special rules to follow. There are also special VAT schemes for small businesses which will have different rules for the application of the new VAT rate, depending upon which scheme they are in. Small businesses will be hit especially hard by the latest rise in VAT as they have had to implement two other changes previously, when VAT was lowered to 15 percent and then increased back to 17.5 percent.

As many businesses had made the decision to absorb the increase themselves, the forthcoming increase to 20 percent will be particularly hard to cope with.

Food, children’s clothes and some other commodities such as books are not subject to VAT, but for those companies who do pay the tax, the future is increasingly uncertain with extra costs to bear. Small business accountants will be prepared for the increase and can advise the correct procedures for implementation.

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