VAT Rate Change

Adapted From http://iaindale.blogspot.com/2008/11/15-reasons-why-vat-reduction-may.html A reader from the above blog came up with 15 good reasons as to why the VAT rate change may hinder instead of help the economy. We have added some of our own analysis to the comments: 1. Deflationary for the next 12 months -- Inflation causes the cost of products and services to go up over time. This VAT rate change will cause prices to go down, possibly risking the growth of our economoy at a time where it is needed most. 2. Reduces business liquidity possibly by over £1bn -- Small businesses will be collecting less in VAT than previously, however, the reduced rate VAT for things like their heating costs, electricity costs and other bills will still be remaining the same, resulting in less cashflow. Additionaly, products bought before the VAT rate change will still have been charged at 17.5%, but may be sold after the rate change at 15% 3. Little or no help to SME’s in the B2B sector Article Continues Below: 4. Helps lower income individuals/families proportionately less than higher ones -- For people at the lower end of the income scale, this will have marginal impact. A high proportion of their spending is on non VATable items or utility bills, where VAT is 5% 5. Gives businesses / retailers abilities to mark up price changes eg 70p chocolate bar is now 68.52p -- Are shops really going to re price products from 70p to 69p? Convential wisdom says the VAT Rate Change will not make a difference here. 6. Reduces the price of cigarettes probably first time in 20+ years 7. Reduces alcohol prices – possibly encouragement to binge drinking -- Both 6 and 7 are not strictly true - while much less covered than the VAT Rate change, the Chancellor has included dute rate increases of 2.5% on alcohol, fuel and tobacco, meaning that these prices will effectivly remain the same. 8. Involves re-priceing by virtually all retailers at their busiest time of the year (supermarkets & garages can cope easily – others less so eg restaurants) 9. Reduces restaurant/ hairdressers etc tip income Lower paid impact again 10. Requires HMC&E to recalculate Flat rate VAT scheme rates & notify SME’s – initial confusion 11. Reversal to recover lost income requires possibly an increase of 33.3% in VAT rate -- What goes down, must surely then go up - and go up by more than the reduction in order to pay for the cost of borrowing that money. Is Robert Peston right when he predicts a new VAT rate of 22.5% within a couple of years? 12. Reversal of rate increase will slow recovery 13. Optional increase in Income Tax personal allowance could have given 75% benefit immediately ie December/ January wheras VAT benefit spread over 12 months 14. Doesn’t reduce food prices – idea why not negative VAT rate! 15. Doesn’t significantly help housing market – critical The question about how the government will pay for this tax cut in the long run is a very valid one. No doubt the government will try to hide their plans as much as possible - there has already been a rumor of a VAT Rate Increase to 18.5% to recover some of the shortfall in the long term, and as predicted above, if they were to increase the VAT rate, it could be as high as 22%.