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AlBlue’s Blog

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Way to screw the economy, Darling

2008, rant

I'm spectacularly unimpressed by the recent cut in VAT and don't think this is going to help with either increasing spending or set the UK up well for the future when it rolls back, or even higher in the future. It's not even going to make a difference at the till for most people; all that will happen is that the extra money will go to the end retailers.

So, how does VAT work? Well, the Value Added bit is the money that the government creams off the top of sales. However, it doesn't affect businesses since they are registered for VAT anyway (over a certain amount, it's mandatory) so for B2B solutions, it just involves putting a different number on a form. In many cases, this may be simple (adding a new VAT code to represent a different rate) but there may be plenty of systems bought years ago which aren't going to cope as well.

Thus there's a cost (whether big or small depends on the foresight of the initial developers; for publicly available packages, this is likely to be easy if they are used correctly - but it's just as possible to use them incorrectly as well, or even make things worse) for all businesses, not just B2C businesses, in making this change. The B2B systems may put up prices next year in order to recoup some cost; if so, that price upgrade will be handed over to consumers in the end.

For B2C companies - from ASDA to Woolies - chances are, they're not going to pass on the 2.5% VAT cut on the whole. In any case, the basic food staples (bread, milk etc.) are VAT-free, so there's going to be little difference in these products. Others are already priced at 5% VAT which will show no change. The majority of items which are priced at standard rate will include those things on offer for £9.99, and you can bet they're still on sale for £9.99 today as well. All that's happened is the profit margin will have increased for the end retailer.

What is likely to happen when the VAT rate is re-inflated in a year's time is that prices will automatically increase, in much the same way that automatic inflation occurred in the Euro zone when the old prices stopped being shown and the new ones were 'rounded up'.

And even though the news media is bandying around 2.5%, the actual difference is closer to 2% for real prices. Consider the following:

VAT-free Price£8.50
VAT at 17.5%£1.49
VAT at 15%£1.28
New price£9.78
Actual saving £0.21
Actual saving2.1%

So the 2.5% figure, whilst technically correct as the decrease in VAT rate, will not result in a 2.5% drop in the prices, even where those price cuts are being passed on. And how many organisations are going to sell something at £9.78 when they can just as easily sell it at £9.99?

None of this helps address the real problem of credit markets, which is where the problem began. This is just a random stab at increasing consumer confidence, which has about a two-week lifecycle before it's old news (and long before the VAT rate reverts back).

If Darling et al were wanting to increase the economy, they'd repeal the Sunday Trading restrictions. The argument goes that shops under a certain size may trade for more than 4 hours on a Sunday, but larger than a particular size may not; so smaller convenience stores may not be disadvantaged by larger supermarket chains. Well, that war has already lost. Tesco has branched out into Metro and Express stores, both of which fall under the size limit and/or are integrated into Petrol stations (which are not affected), and already continue to make profits long into the small hours of Sunday mornings at inflated prices. In fact, Saturday and Sunday are the two biggest trading days of the week (outspending the rest of the week put together) and we're needlessly hobbling ourselves with only opening for 75% of that time. If rejuvenating the economy was a real goal, then that's a much bigger win than a virtual 2.5%; to boot, it would also increase the spending (and thus VAT contributions) whilst also increasing jobs.

Not only big stores are affected by Sunday trading. If several large stores in a shopping centre are closed, there's little incentive for smaller shops to open because the customers won't be there. Similarly, when larger shops are open, smaller shops get more footfall in the local area precisely because the other shops are open. It's a win-win situation for everyone. And don't forget that many stores have on-line shops which are still doing business late into Sunday night that currently have a competitive advantage on their real-world counterparts.

Opening all day every day is the norm in Scotland and other enlightened countries; the only reason we have restrictions on a Sunday is due to the 7 in 10 people whose religion associates some significance with that particular day (and ignoring the fact that of those 7, a good number aren't that bothered). After all, we can call on the 0.7% Jedis and the other believers (who have different opinions about Thursday and Friday). After all, their beliefs are just as valid.

Stating the bleedin' obvious; my opinions and beliefs are my own, not that of my employer or anyone else. And may the force be with you if that's your thing.