VAT rate cut could prove an IT challenge

26 Nov, 2008

Although changing the VAT rate from 17.5% to 15% within business systems is relatively easy, it has widespread implications inside the organization, across the supply chain, and for the customers. We all hope that the plans mapped out in the Chancellor of the Exchequers pre-budget report earlier this week will have a positive effect on the economy but there are major challenges ahead and not only at an economic level. The decision to drop VAT by 2.5% on a wide range of goods will challenge businesses – and their business management systems, particularly financial management and enterprise resource planning (ERP) applications. VAT is to be cut from 17.5% to 15% from 1 December 2008 until 31 December 2009, and Chancellor Alistair Darling has urged retailers to pass this reduction on as soon as possible. This gives the most agile businesses around seven days to make the change if they aim to abide by the Chancellors wishes. Conforming to the request is not going to be easy. It is not just a matter of repricing goods on the shelves and Point of Sale systems. It means making, checking, and testing changes throughout the entire inventory, the up and downstream supplier network (catering for different change timelines of the various suppliers within the chain), and in back office systems and related processes such as financials and ERP systems. As a result, some retailers are expected to struggle and may not be able to think about applying the reduction until next seasons goods arrive. Of course, businesses are used to financial change and modern systems are designed to cope with rate changes the days of hard coding rates (be it VAT, National Insurance Contributions, personal tax allowances and so on) have (mostly) past. However, businesses usually have many months to prepare for budget-related changes, not just one week. Furthermore, changes are generally implemented at a time when there are no other pressing requirements. This VAT drop is being introduced in the run-up to the Christmas shopping frenzy, a time when businesses need to concentrate on handling volume transactions rather than altering their core systems. Retailers have already identified the prime problem areas. UK financial systems supplier CODA reports that concerns centre on four key issues. The change will override their traditional pre-Christmas systems lock-down, which is put in place to minimise risk during a key trading period; there will be time and costs associated with changing price tags; communicating price changes and setting a round number price point will be difficult; as will handling customer refunds. The key message is that although changing the VAT rate from 17.5% to 15% within business systems is relatively easy, it has widespread implications inside the organisation, across the supply chain, and for the customers. The change ripples out across business processes, potentially impacting the ability to transact, report, and respond to all those normal business exceptions. However, the challenge could be highly educational. For the past few years one of the key strategic IT objectives has been to design and implement systems and processes that enable business agility. This short notice (and relatively short term) VAT rate change will be a good test of how effective these changes have been, and highlight areas that need further attention.