The VAT rate change: Watch your sell prices!

On the 1 January 2010 the uk VAT tax rate will change back from the temporary 15% to the standard rate of 17.5%. The means that small retailers once more need to revise their selling prices accordingly.

Most EPOS software systems will have a single point to set the VAT tax rates. A system configuration screen will allow you to set the VAT rate to 15% or 17.5% - and this rate will be used in all VAT calculations in the system. However, the price displayed to the customer depends on how the price is stored on the system. This recent pair of VAT tax rate changes are the first rate changes in the history of computerised EPOS system, and this has created a bit of confusion for customers.

Some poorer EPOS systems will store the ex-VAT price for stock items. VAT is then added at the point of sale to get the gross price. This approach is fundamentally flawed for retailers. Retailers like to set prices as gross, e.g. 1.99, and they expect that price to be appear at point of sale. However, if this is actually stored as ex-vat 1.73, prices issues can arise, especially when dealing with multiple quantities.

A decent EPOS system will store the prices including VAT - and this is the price the customer sees. VAT is then calculated from the gross price at point of sale.

The impact of this on a vat rate change is quite subtle. If I currently buy items at 40p (net cost price) and sell them for 99p gross retail price, I will make a profit of (99/1.15)-40 = 46p based on a vat tax rate of 15%. If the system wide vat rate is changed to 17.5%, and the sell price left unchanged, your profit will fall to 44p. So, when you change the VAT tax rate you also need to change your sell prices.

This means the retailer has two choices. He can either leave the sell price untouched, or, he can adjust the sell prices to match. With the forthcoming rise in the VAT rate, leaving the gross sell prices unchanged will mean that the retailer pays for the change - saving the customer money. If you do wish to change your prices (in the example above, to 101p) then the cost is passed onto the customer, and the retailer's margin is unaffected.

In the last rate change from 17.5% to 15% a lot of retailers didn't change their prices, so when the rate reverts to 17.5, everything will be as it was last year.

Obviously 101p is a silly price to sell a product at. When the modern retailer needs to do is review all their sales prices in a holistic fashion, increasing some prices sensibly, and keeping some the same. Those products where you do not change the price represent a marketing opportunity, whilst those that you do change, will cover the cost of the unchanged items. You need to make sure that you're not loosing money because of the change to the VAT rate overall - but different products can be treated differently.

Make sure that your EPOS software provider gives advise on re-calculating the sales prices to reflect the new tax change, otherwise you could suddenly find you are loosing money!

From a cash flow point of view, don't forget that the increase in VAT rates means that their will be a spike in retail sales up to the end of year, and the early january fall off will be more severe than normal. It is going to be a long dark start to 2010 for a lot of retailers - and you don't want mathematical errors ruining your margins.

It is not impossible that the VAT rate change will be aborted by the government at the last minute - otherwise we will certainly see another slew of big retail business' going bust when the first quarterly rent bills are due in 2010.