As all the papers predicted, VAT has been reduced from 17.5% to 15% with effect from 1 December.
I sympathise with the Chancellor. He needed to do something to have some immediate impact and there was probably no other way that would appear to be as dramatic. Like many things in the modern world, perception is perhaps more important than reality. The perception to many people up and down the country who perhaps don’t fully understand these things is that there has been a major cut that will reduce prices. The drop in VAT from 17.5% to 15% is only worth under £2.50 for each £100 spent. For a £20 item, the saving is under 50p. Furthermore, I have some real concerns as to whether the retailers will pass these savings on at the lower level. The administration costs of changing price labels on goods will far outweigh the benefit.
No, the perception is the key here. The Chancellor has in my opinion gambled that this announcement, which at first sight seems so dramatic, is going to kick start consumer confidence. The reality will unfold over the coming weeks and months. I would actually like him to be right, but I have my doubts. What I fear is that the immediate effect will be a splurge in the run up to Christmas, but January could be a very difficult month as unemployment continues to rise and people restrain their spending out of fear of the unknown.
Wearing my business man’s hat, I am more concerned about the implications of all this. Firstly, as I have already said, if retailers chose not to pass this saving on, they in fact will be something like £2.17 better off for each £100 exclusive of VAT of goods. With corporate profits under pressure, there may be some temptation; one might even say an irresistible temptation, to take such a course of action.
For those of us providing services business to business, we are all going to have to amend our systems to take account of this new rate. This is going to be have be done probably in the middle of VAT quarters at a very short notice, (less than 1 week).
I am sure mayhem will ensue. Apart from potential VAT errors, I expect many accountants up and down the land will be rubbing their hands with glee at the prospect of having to charge extra fees for their client’s accounts to sort out a VAT mess.
Anyway, my sympathies do go to Alistair Darling. He didn’t really have much else he could do and it is a bold step. Taken together with reductions in interest rates and oil and food prices starting to come down, he may just get away with it, but if he doesn’t – who knows what’s next.
Anyway, we shall all be watching with considerable interest.
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