Alistair Darling’s instant VAT reduction may encourage spending in the economy but could end up costing businesses dearly when they can least afford it. Retailers will be hard hit by price tag changes in the busy period leading up to Christmas and businesses that have hard coded 17.5 percent in spreadsheets will face the huge unplanned task of tracking down every instance of VAT and making the required changes. Gary Simon, FSN’s managing editor reports.
Chancellor’s instant VAT giveaway to cause short-term business havoc
CODA the financials software house which lists major retailers such as Debenhams, Next, IKEA, Mothercare, Lakeland, and Monsoon in its customer base warned of retail confusion as 2.5% VAT cut is introduced with many believing thatit will cause more problems than it solves at a time when they are already discounting heavily. Among the concerns cited were the risk of IT problems by overriding the pre-Christmas systems lock-down, the time and cost associated with changing price tags, handling customer refunds, communicating price changes and setting a round number price point.
“It is clear from talking to our customers that many are unprepared for this change which comes into effect immediately,” said David Turner, Group Marketing Director at CODA told FSN, “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. 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.”
According to CODA, 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.”
But it is not just retailers at the point of sale that will be affected. VAT settings within nearly all finance systems are parameterised and therefore amenable to a quick change but this is not necessarily the case for spreadsheets, covering applications such as cash flow, budgets and forecasts. A VAT change without warning will create a severe and unquantifiable burden for businesses that simply were not expecting a change and ‘hard coded’ the previous 17.5 percent VAT rate into their spreadsheets.
Kevin McCallum, commercial director, Pegasus Software told FSN, “We understand that we live in interesting times and the need to be flexible, but we received notice of the change from HMRC late last night to be introduced next Monday. Although changing the VAT code in our applications is very straightforward it isn’t something that people do every day. Our customers will need reminding how to do it. With more notice our customers could have made the change much earlier, invoking the change as required using the ‘effective as of a specified date’ facility. Without sufficient notice there will be unnecessary mistakes and omissions.”
Ewen Ferguson, Associate Director at Protiviti, a provider of risk consulting and internal audit services points out that companies face the added burden of having to make this change to their IT systems in the middle of the tax year. He told FSN, “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”.
However, Ferguson did hold out some crumbs of comfort. “Through specialist software, companies can scan system tables, code and spreadsheets for hardcoded VAT figures, allowing for a fast and effective identification of where changes are likely to be required,” he added.
Ralph Baxter, CEO of ClusterSeven, a provider of spreadsheet management solutions told FSN, “You could check each spreadsheet individually, cell by cell for each permutation of 0.175, 17.5 and 1.175 but you would be reliant on user diligence being maintained all the way through to the millionth cell of the hundredth workbook and you would still be unsure whether there was a problem in the associated VBA or macro code,”
ClusterSeven’s solution uses one dimension of its logic-checking product ‘Spreadsheet Integrity’ whereby user-specific searches of spreadsheet content can be performed at speed from central servers. This avoids running or loading software on the desktop, providing a much more efficient and complete solution than individual manual queries. For users who don’t want to install any software on site ClusterSeven will run the software over your spreadsheets at its headquarters.
“We provide a simple report on where the problems are. Once they are fixed, a second report can give you a clean bill of health,” said Baxter.
"The recent mandatory VAT changes provide an excellent opportunity for businesses to properly assess risk, remediate, and control key corporate spreadsheets used in VAT and other calculations," said Grenville Croll, Trintech’s Spreadsheet Specialist. "Trintech’s XLNET solution can help to minimize overall costs associated with the mandatory VAT rate adjustments and streamline the effort needed to place spreadsheets under proper control.”
