Pricing strategies of businesses across the UK are heavily influenced by VAT (Value Added Tax). In particular, retailing and service providers need to think carefully on VAT in defining their pricing models by abiding to HMRC rules at the same time as remaining profitable and competitive.
This blog looks at how VAT influences pricing strategies and shares actionable tips for retailing goods or providing your expertise to help you overcome these challenges successfully, whether you are a retailer or a service provider.
VAT and how it Pertains to Pricing
In the UK, most goods and services are subject to VAT and the VAT must be included in a businesses price. VAT however has a number of effects in pricing many of which deal with profit margins, customer affordability, and overall competitiveness in the economy.
VAT Basics for Businesses
Standard Rate (20%): Nearly all goods and services.
Reduced Rate (5%): It only applies to certain type of products, including energy saving products or children’s car seats.
Zero Rate (0%): It deals with basic foodstuffs and children’s clothing.
Exemptions: There are some sectors to which VAT does not apply: education, health care and financial services.
For accurate pricing it is important to know which VAT rate applies to your business.
VAT and its effect on Pricing Strategies
1. Cost-Plus Pricing Adjustments
Cost-plus pricing is commonly used by the retailers and the service providers by adding up some kind of markup to the base cost. In addition to this, VAT adds an extra layer. For instance:
When a retailer buys a product, let’s say for £50, they have to make a decision whether to include the VAT already paid to them (£10 at 20%), in their pricing.
The selling price must also think about the VAT that will be charged to the customers in order to achieve a desired profit margin.
Key Insight: This is always to be transparently integrated into your pricing model, to avoid undercharging for VAT or overcharging.
2. Competitive Pricing Challenges
This is particularly difficult in balancing the market competitiveness and VAT inclusive pricing. For instance, had VAT rates differed in industries where prices are regulated by market forces, firms would pass the VAT cost on to customers, thus reducing demand.
Solution:
Analyse your competitors’ pricing tactics so to maintain competitive pricing while including VAT.
Especially for high volume or low margin products, absorb a portion of the VAT cost anyway.
3. Psychological Pricing and VAT
VAT can disrupt psychological pricing by avoiding prices that end with a certain digit (for example £9.99 rather than £10.00). Thus, ending up with a VAT inclusive price and an awkward amount (e.g. £11.83) may put off customers.
Solution:
Calculation would work backwards from the desired customer facing price to the VAT inclusive price.
Automation is needed with software for these calculations and all pricing should be consistent.
Practical Insights for the Retailer.
1. Discounts and Promotions and VAT
VAT implications need to be considered when discounts and promotional offers are given. For example, if you offer a 20% discount on a £100 product:
Tax adds for VAT must then be recalculated on a figure of £80, not the original price.
Tip: Don’t confuse your customers by not clearly communicating VAT inclusive prices in your promotions.
2. VAT and Online Retailing
VAT compliance for e-commerce businesses getting tangled when selling to the UK customers is tough, if the customers are not based in the UK.
Under the One-Stop Shop (OSS) scheme, VAT rules that apply to B2C sales to EU customers do vary by country.
Goods may qualify as zero rated for exports outside of the EU but proper documentation is required.
Practical Insights for Service Providers
1. VAT on Time-Based Services
Consultants or designers may be priced on an hourly or project basis. Transparency requires that you include VAT in your quotes.
Any rate quoted must clearly indicate whether or not VAT is included.
Disputes and customer dissatisfaction are caused by ambiguity.
Action Step: All your quotes and invoices should contain clear and upfront communication about VAT.
2. VAT and Subscription Models
When a subscription-based service provider charges using their service rate, they will need to-account for VAT in recurring charges.
In example a £10/month subscription becomes £12/month with VAT at 20%.
Consider, for price sensitive markets, how changing to VAT inclusive pricing impacts on customer retention.
Best Practice: Provide VAT-inclusive and VAT exclusive pricing on your website, so you keep it transparent.
VAT Management for Margins Protection
Carelessly managed VAT could erode the profit margins. Consider these approaches:
1. Use VAT Schemes to your advantage
The Flat Rate scheme may help small businesses cut down on there administrative burden and simplify VAT calculations.
Instead of calculating VAT every time there is a transaction, you figure a set percentage of turnover.
2. Optimise Input VAT Claims
An important part of managing margins involves reclaiming VAT (it’s known as input VAT).
All business related purchases should be documented properly so that the full input VAT is claimed.
Only claim your business use portion of VAT if an item is mixed use (e.g. a laptop used for both business and personal purposes).
3. You Can Strategically Pass onto VAT Costs
So, evaluate your customer base to determine whether to absorb VAT costs or charge them onto the customer.
Where products are price sensitive, think about absorbing a slice of your VAT to keep up.
VAT Related Common Mistakes in Pricing
1. VAT Forgetten in Inclusive prices
If you keep taxes inclusive in your prices, make sure you haven’t left out the correct VAT amount.
Example: The net price of a £100 item (including VAT) should be £100 and a £20 VAT
.
2. Even if a Good or Service is misclassified.
There are penalties for incorrectly applying VAT rates.
For example, if standard VAT is charged on zero rated items, customers could be over charged.
Tip: Search HMRC guidelines and cheque with Centralyze Accounting LTD experts for guidance regularly.
3. Ignoring VAT Thresholds
But small businesses around the VAT threshold (£85,000 a year in turnover) may accidentally go over, requiring mandatory VAT registration.
Solution: Pay close attention to the amount of turnover and prepare for VAT registration.
What should you pick: Centralyze Accounting LTD for VAT Support?
Centralyze Accounting LTD is a specialised VAT help for retailers and service providers. Our tailored solutions include:
- VAT compliance and margin by expert advice.
- Of VAT returns, handling efficiently, accuracy of submission and in time.
- VAT schemes advice that best suits your business.
By working with us, you’re able to concentrate on growing your business rather than getting caught up in those VAT compliance complexities.
Conclusion
VAT also has an important role in setting up retailers’ and service providers’ prices. VAT has to be accounted for carefully in businesses pricing models, from working out profit margins to making sure they are done in compliance.
You can establish effective pricing strategies in relation to compliance, competitiveness and profitability using the understanding of VAT rules, leverage of technology and professional help.
When you need expert VAT guidance and comprehensive accounting from a trusted supplier, we at Centralyze Accounting LTD support your business. Learn more with us today about how we can assist your business to flourish in the arena of VAT and pricing.