Sunday, November 23, 2008

A Real Life Example of Why the VAT Cut Won't Boost the Economy

A reader emails...

"I'm a small VAT registered business and I will NOT be passing on any VAT reduction. Therefore I'll pocket any benefit rather than my customers. I'm very sorry about this - but it's too much hassle for minimal gain.

Think about this. In my Xmas leaflets (printed in October) I merely stated that "All prices are inclusive of VAT." But what if I'd also quoted the 'current' VAT rate of 17.5%? Thank goodness I didn't - because then I'd have had to pulp all my price leaflets and organise a reprint that quoted a new 15% VAT rate, or whatever.

Brown just hasn't thought this through - he's too interested in doing the ultra-clever solution that is more complicated than the obvious solutions. And of course only Brown is clever enough to think of these over-complicated solutions - he's probably already on his hotline to political leaders as I write so that he can relay to them further advice born out of his undoubted genius ?

What a clown."

A second reader comments...

"I work for a retailer, and i can assure you that in all likelihood, we won't be rushing to reduce prices to silly amounts like £2.92!"

And The Village Postmaster explains HERE why the VAT cut won't work for his business.


Old BE said...

Especially as the change will only be temporary.

Anonymous said...

As a retail consumer, I'm hardly likely to be influenced by a price reduction on an item of say £100 (including VAT), to £97.87, which is what a 2.5% reduction in the VAT rate would provide.

Alex said...

I thought this was supposed to provide relief to the poorest who spend the highest percentage of their household budgets on food.

Remind me again, what is the rate of VAT on food?

davefromluton said...

And as a purchaser, getting £2.50 off for every £100 I spend is hardly going to persuade me to rush out and buy.
I shall carry on as before - except my savings returns have just been reduced by 1.5% so on a deposit of £50,000 I am £750 p.a worse off.
So I shall have to cut back on spending anyway

50 Calibre said...

Retailers will be about as keen to pass on the cut in VAT as the banks are to cut their rates and start lending again. We'll never know quite what goes through Brown's addled remains of a brain. If only he had ever had a proper job in the real world he might realise that people in general aren't as daft as he is.

Q: What colour the sky is on Brown's planet?

A: It's the colour of beautiful nonsense.

You couldn't make it up, could you...

Wrinkled Weasel said...

Unless you are Mr Thick, of Shitbrain Close, Twitsfield, you know this is the last ditch attempt of a desperate Government engaged in a scorched earth strategy. As others have said, it will make no difference. If it makes any difference at all it will not be noticed amid all the other rising costs and the rampant devaluation of the pound. It will certainly not change my current spending habits which,due to the crunch, would make a stylite feel feckless and profilgate. Thank God for Aldi.

Mitch said...

What`s the betting that the reduced rate on VAT expires the day Cameron walks into NO10? forcing him to put it up in his first budget.

no longer anonymous said...

I want an income tax cut, not a sodding VAT cut.

Anonymous said...

i still can't quite believe that they're actually going to go through with this.

the Sunday Times reports:
After considering a range of schemes, ministers concluded that Vat cuts would be the most effective way of stimulating the economy because they provide a direct incentive for consumers to spend.


as well as mentioned before by others that saving £3.50 in every £100 is seen as so small as to not be worth worrying over, the plain fact is that retailers simply WON'T PASS ON the savings. Mostly because to do so would require re-pricing absolutely everything in their stores.

Think about that for a moment. every single item you see with a price sticker in your high street shops. every single price label on supermarket shelves. changing the pre-printed prices on packaging. Not to mention the hassle of changing the price of every single product line in the till system. It just ISN'T GOING TO HAPPEN.

Granted, the supermarkets would find it easier, but small retailers like the one i work for are not going to take up a week of their employees time - at whatever time of the year - to re-price everything, simply so that they can report at the end of the year that their sales are a further 2.5% lower than they would otherwise have been.

gahh i could go on and on about this stupidly ridiculous idea. It's been cooked up by people who have probably never worked for a real company long enough to be able to see the obvious and massive flaws in their plan.

Thankfully there are enough people working in retail (and who know people working in retail) in this country, for the whole country to realise that as stupid ideas go, this one is right up there with the best.

not an economist said...

I will probably be proved wrong - GB is much clever than me - but it seesm odd to me that this has been leaked. I therefore wonder if it is all a red herring designed to wrong foot the Tory leadership before the parliamentary debate.

Torymory said...

Having spent 28 years in the wholesale & retail industry (till made redundant this year - thanks Gordon) I can see that this proposal will cause no end of trouble and expense for businesses small and large. Work required includes:

(1) Re-programming data in the computer systems and recalculating prices.
(2) Physically re-ticketing goods (including re-printing bar coded tickets) of thousands of individual products.
(3) Reprinting (and re-posting?) promotional material, including leaflets, catalogues, updating websites etc.

And all for a temporary measure, so the work will have to be reversed.

Most larger value items are 'price-pointed' anyway (i.e. rounded up to .99, or nearest £1, £5, £10 etc), so even if the retailer recalculates all prices it will make no great difference to the consumer on many items if the price would remain at the same ‘price-point’. Food and many essentials are zero rated anyway, so the supermarket bill is not going to decrease greatly for consumers.

A ridiculous proposal - it shows how ignorant this government (and their civil servants) are with regard to the practicalities of commerce.

Davein said...

For all goods received by suppliers they will have been invoiced at 17.5% which is the VAT rate at the time of supply(input).
So I assume they will have to charge the new rate by law(output) at the time it comes into force.They will then have to pay Customs& Excise the difference in the two amounts.They have to supply a VAT invoice to you if you request one.
A mere reduction of £2.50 per £100 isn't going to make me rush out and spend.

Letterman said...

The reason that Brown is doing this is to undermine George Osborne - because Ken Clark proposed a VAT cut about a week ago in some discussion on the economy, i think it was on Channel 4 news but I can't remember - it could have been Newsnight.

Not a sheep said...

My quotations and tenders have always stated that prices are exclusive of VAT which will be charged at the prevailing rate, so my customers would pay less BUT as they are all vatable businesses it will make no difference as they reclaim input VAT anyway.

Blackacre said...

No harm in businesses trousering the 2.5% to add to profits instead of passing it on, provided that their competitors do the same. That in itself is a stimulus to the economy via higher tax revenue back on that profit.

Mark Wadsworth said...

If you believe the Big Fat Lie that VAT is a tax on consumption ‘borne by the consumer not the producer’ you won’t understand the point of the VAT cut.

However, if you understand the distinction between ‘legal and economic incidence of a tax’, you will realise that it is a tax on turnover (or, if you twist my arm, a tax on gross margins, let’s not split hairs). Ergo it is a tax on business.

I don’t expect that businesses will ‘pass on’ the VAT cut, because retail prices are set by supply and demand in the shops. If M&S have to cut prices by 20%, then they will.

But the reduction will allow businesses to keep an extra 1.85p for every £1 gross turnover, which might be enough to keep a few more businesses afloat than would otherwise have failed.

And let’s not forget that once you strip out banks and North Sea Oil, the rest of UK plc pays four times as much in VAT as in corporation tax. So a 2.5% VAT reduction is worth as much to them as a 14% reduction in corporation tax.

Mark Wadsworth said...

... I note that Blackacre has summed up the merits of this most admirably. Well said.

Roger Thornhill said...

A numpty "reporter" (a.k.a. Socialist Shill) said that reducing income tax would mean people would save more (i.e. pay off their debts!) but a VAT drop would only allow people to save if they went out and spent money.

That "saving" is the same "saving" that certain people think of when they buy that £1000 handbag you have no need for reduced to £400, as it "saves me £600". No, you save money by NOT SPENDING IT. True savings come from essentials and that which you would normally have bought anyway, so in that case all it does is reduce the income to the treasury. Morons.

Anyhow, isn't there a rule that one Parliament cannot bind future ones. Explicity not funding expenditure until after an election seems to me to be unconstitutional!