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As Alistair Darling scrambles to deny plans to raise VAT to 18.5 per cent in order to pay for his borrowing binge the row over the problems it will cause for UK businesses deepens.

A Treasury document, available here, apparently put online accidentally, showed the government did have plans to jack VAT up to 18.5 per cent from 2011 - Darling announced on Monday a 13-month cut in VAT to 15 per cent in order to stimulate consumer spending. The mooted increase was rejected in favour of an increase in National Insurance and the new 45p tax rate.

Many retailers are not going to pass on the 2.5 per cent cut in VAT because they are already discounting prices and want to restore margins which have been eroded over the last six months. With High Street spending already in freefall many doubt that a 2.13 per cent cut in prices will be enough to tempt consumers back into the shops.

Those retailers that are passing on the tax cut are struggling to get their systems changed in time for Monday.

Software developer Infotribe told us it expects a flurry of work from clients, and probable follow-up testing work once the changes go through. Managing director Kevin Smith said: "It's not as straightforward as we imagined. We put the change in for one of our clients last night, and the server has gone down. We have to manually adjust many rates and hop around the system - it does require a thorough audit."

Smith said most of the firm's regular clients had already been in touch about the change. Smith warned that there were similarities with the Millennium bug and there would likely be bug fixing work to do next week.

Industry analysts Butler Group warned that although the change was relatively simple it would have implications throughout the supply chain.

Angela Eager, senior research analyst at Butler Group, said: "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."

Because of this some businesses will not pass on the saving. Eagle said that firms would usually have months to adjust systems and would not choose to do so in the run-up to "the Christmas shopping frenzy".

We've also heard from software developer within the motor industry warning of potential problems.

He said:

"I work for a company who supplies vehicle sales software to the motor industry and our system calculates VAT at many different points in the process. On the whole our main system won't have any problems with the VAT change as it's a global parameter but there are points in our procedures, which sit slightly outside our main system (order forms and import routines), which do have the VAT hard coded into them.

"Our system is quite robust in it's design but surely there's a lot of hard coded 17.5's out there. Is 7 days not a little short notice for every IT system in the UK that's involved in selling something to change?"

Despite Alistair Darling's claims that his Budget was aimed squarely at small business thousands of firms are actually going to be worse off as a result of the changes. Smaller firms can opt to pay VAT at a flat rate of between 2 and 12 per cent. But these firms charge VAT at the full 17.5 per cent rate and are allowed to keep the difference themselves. Such firms have effectively been hit by a 2.5 per cent cut in revenues. ®

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