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Tuesday, 25 November 2008

PBR - Can anyone see how the VAT rate cut can work?

I am struggling to see how the 2.5% VAT rate cut can stimulate the economy. If passed on across the board, it would mean a price cut of 2.1% in goods sold in the shops. I can't see how that will cause consumers to go out and buy things they weren't already going to. The stores are already running sales with 20%-25% savings in an attempt to kick start spending, 2.1% will be a drop in the ocean.

Part of the problem is that the government have created this expectation of a rate cut across the board. The retailers may be able to stimulate spending if they were to use the extra margin available to strategically target price-cuts, allowing them to show big discounts on some items. However because of the expectation built up in the consumers' minds that there will be a 2.1% price cut on everything, it will be difficult for retailers to do this.

There are also significant costs attached to the change, both to retailers and businesses selling to other businesses, who will get no direct benefit. Accounting systems across the land will need to have their rates changed, although in most cases this is hopefully quite straight-forward. Worse are all of the areas we forget about. In my small business (where all of my sales are to other businesses who claim the VAT back anyway), I have come across four today:
  1. My training fliers need re-printing because although prices are quoted excluding VAT, the payment amounts stated need to be changed;
  2. My expenses forms (in Excel) that calculate the VAT element for fuel need editing;
  3. My Paypal account needs its rate changing for online sales of Excel training courses and videos
  4. Numerous spreadsheets calculating commission payments need editing
These changes are in addition to the changes to my accounting system, and my business is tiny compared to most. I also know I will stumble across many others over the next few days.
As far as I can see, this change will introduce a significant administrative cost to virtually every business in the UK, and the benefits even to retailers (who are the only businesses who can directly benefit from this) are dubious.
I hope I am wrong, I would appreciate any comments from everyone else.

1 comment:

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