Companies in the Midlands should be taking steps now to ensure their profits are not impacted unnecessarily by the planned VAT increase on 4 January 2011, according to experts at PricewaterhouseCoopers LLP (PwC).

The VAT increase will affect all businesses, but it is suppliers working with organisations such as banks, charities and the education and healthcare sectors, that are likely to come under the most pressure when passing on the increased VAT rate to their customers. 

Most companies can claim back any VAT they are charged when doing business. However, certain organisations cannot claim back all the VAT they incur and for them, the planned 2.5 per cent uplift represents a significant increase in costs.

This will also impact on suppliers who have little or no flexibility over price or who have agreed VAT inclusive prices with their customers before the VAT rate increase was announced. 

Paul Jackson, tax director at PricewaterhouseCoopers in the Midlands, comments:

"To a company that is not fully taxable, such as a bank or charity, the rate increase is effectively a 2.5 per cent surcharge on the cost of goods and services as they cannot claim this money back.

"Suppliers working with these organisations may find it difficult to re-negotiate terms if they agreed a VAT inclusive price prior to the VAT rate increase being announced. In this case, the suppliers may find themselves having to take the hit or at least absorb some of the cost."

Businesses affected by the VAT increase will need to revaluate their cost base now in order to maintain profits when the increase comes in. There are a number of possible actions they can take without causing an adverse impact on their ability to do business.

Paul Jackson, tax director at PricewaterhouseCoopers in the Midlands, concludes: "Any organisation faced with the prospect of having to absorb the additional VAT charge needs to be considering now whether steps can be taken to manage their cost base..The VAT regime does include a number of reliefs and exemptions and businesses need to make sure they are aware of these and are taking advantage of them.  In some cases, efficiencies can be built into supply chains and there may be cheaper ways of operating or sourcing goods. 

"By taking steps to trim their cost-base now, organisations will ensure the 2.5 per cent increase in January does not translate to a dip in profits."