A business support organisation is warning firms that the January VAT rise could leave them with a New Year headache if they fail to prepare properly.

All VAT registered traders will be affected by the increase, which will see VAT rise from its current 17.5 per cent rate to 20 per cent at midnight on 4 January.

The change only affects items charged at the standard rate of VAT. Goods and services which are zero rated, reduced rated or exempt will be unaffected.

The Forum of Private Business is warning that - while the change is simple in theory - smaller firms that things can easily get complicated when put into practice.

Forum chief executive Phil Orford said: “Many smaller businesses will have to changes their prices before they start trading on January 4 and this will take a sizeable amount of forethought for retailers with thousands of items in their product ranges. Businesses can of course keep their prices the same and absorb the increase but this will affect their bottom lines.

“However, the main problems businesses are likely to encounter around the VAT rise will be with their accounting systems.

“Firms will need to make sure that their accounting system changes accordingly and is issuing invoices and recording sales and transactions at the new rate from January 4. Any outstanding invoices for work which was genuinely carried out before the date can still be processed at 17.5 per cent so most businesses will probably need to create a new standard VAT code at 20 per cent, but retain a code for the old 17.5 per cent rate.

HMRC has said it will be taking a ‘light touch’ in dealing with errors made in the first VAT return after the change if the error relates to the change of rate.

The forum is advising small businesses to invest in online accounting software in order to make the VAT change process a painless one.