Cloud coders ready for VAT rate change

Suppliers of web-based accounting applications to customers in the UK have pounced on the government’s VAT rate rise on 1 January 2010 as an opportunity to demonstrate the advantages of Cloud Computing.

In his Pre-Budget Report on 2 December, Chancellor Alastair Darling confirmed the 2.5% increase, which was scheduled when he reduced the rate from 17.5% to 15% on 1 December 2008. The reduction was intended to soften the effects of the recession on small businesses. But in trying to ease their cash flow difficulties, the Chancellor created an administrative nightmare.

As well as requiring VAT-registered businesses to alter the default VAT rates in their accounting software to cope with the rate switches, complex rules also apply to the rates that should apply credit notes and late or partially paid invoices.

For most products and services the basic tax point is the date on which the supply was actually made. If an invoice is raised more than 14 days after the basic tax point, then it reverts to the original date of supply rather than the invoice date. More complications arise for those who make continuous supplies or issue annual invoices for ongoing services.

NetSuite, Xero, e-conomic, Twinfield and native UK developers such as Aqilla, Arithmo, Fusion, KashFlow, Liquid, Pearl and FreeAgent all reassured customers that they would be able to comply with the 1 January rate change “without having to lift a finger” in NetSuite’s words.

NetSuite offers a SuiteBundle application that lets users set in train an automatic tax code and product list update on 1 January.
 
“The change in the UK VAT rate presents a challenge to businesses to ensure compliance, especially during the busy Christmas period,” said NetSuite’s EMEA managing director Steve Sydes. “Thanks to the SuiteCloud platform, customers can prepare now and relax for the remainder of the festive season.”

As with desktop accounting products, developers are approaching the problem in different ways. Pearl Office is planning to alter the default VAT rate within its core system on 1 January, but will not touch open sales or purchase orders within customer databases to ensure the VAT charged applies to the correct tax point. Product tax rates are stored in Pearl as net price plus tax, so users can choose to keep the gross amount the same (soaking up the tax increase in their profit margin), or increase the gross price simply by changing the default tax rate, Pearl explained.

But businesses should not just overwrite their standard VAT rate, warned AccountingWEB.co.uk editor Rebecca Benneyworth, as they will need access to both the 15% rate of VAT and the 17.5% rate for some time after the change to deal with credit notes raised on supplies made during 2009. Any such refunds will have to be credited at 15%.

Both e-conomic and FreeAgent Central confirmed that their systems will handle multiple rates to deal with credit notes and late arriving sales invoices.

The VAT flip-flop has caused headaches for UK businesses, but the real crunch came last year when they were confronted with the initial rate cut. The Cloud industry may be trying to exploit the situation to its advantage, but having made the transition a year ago desktop software users should now be able to reverse the process on 1 January.

But according to industry insiders, where the Cloud really pays off is in communicating with their customers. KashFlow managing director Duane Jackson explained that his customers currently see a message on their dashboard explaining the changes and all they have to do is to click to opt into the automatic update at midnight on 31 December.

Xero’s Gary Turner also opted for the dashboard and blog route and commented that in this situation a press release was not as effective. While Cloud accounting customers could let their hair down on Hogmany, he predicted some “enforced sobriety” for people who needed to nurse larger and more complex software through the changes.