blog.sparetomato.com

I’m not a political blogger, I don’t even pretend to have the slightest interest in british politics unless they have any direct impact on me, or more usually, if they are going to cost me more money.

The 2.5% cut in UK Sales Tax (Value Added Tax) is one such example.

In a desperate attempt to revitalise the UK economy, the Chancellor of the Exchequer has decided that people will start spending money again when they hear that they will pay less tax on them.

UK consumers are usually unaware of the fact that the price they pay in the shops for the majority of goods in includes a 17.5% tax, so if you’re paying 50p for a Mars bar, just under 9p of that is tax, so you’re really paying 41p to the shop for the Mars bar, and the shop is collecting 9p that it pays to the Government.

In addition, certain goods carry a duty tax, including cigarettes, alcohol and petrol.

By announcing that the VAT rate will be cut to 15%, Alistair Darling has effectively brought attention to the fact that we pay VAT on goods.

What is not so widely reported (yet) is the fact that duty on goods is being increased to offset the effects of the VAT rise.

So, the price we pay at the petrol pump should remain the same.

However, there are other, deeper implications to this.

Businesses can claim the VAT they pay on fuel back from the government. By effectively moving the 2.5% from VAT to duty, that increases the costs of transport. The cost of putting £100 of fuel in a lorry changes from £82.50 to £85. While £2.50 is not a significant amount, consider the fact that most haulage companies will be spending thousands of pounds on fuel per week. When you consider £4000 worth of fuel, the difference becomes £100 – this cost adds up. Coupled with the fact that this reduction is only temporary for 13 months, whereas the rise in duty is permanent, the VAT cuts are nothing but a con.

And what does this mean to the humble Mars Bar? well, it comes down to 47p, but will the 3p extra in your pocket be worth it, and will the shop actually pass the cut on in the long term, as the cost of transporting the Mars Bar, and therefore the cost to the shop of stocking the snack that helps you Work, Rest and Play also goes up.

One of the other side effects that has probably not been considered by Mr. Darling is the fact that a lot of pricing and invoicing systems are computerised. I know from my own experience that the VAT rate has been hard-coded into many systems. Thankfully, I’ve not written a system that does VAT calculations but I wonder how many systems will be requiring a rapid re-write?

The added problem is that invoices produced prior to December 1st, will still be applicable for 17.5% VAT, so if the system calculates the VAT ‘on the fly’ from the NET value, the system is in trouble, as it could end up displaying legacy invoices with the wrong rate of VAT applied.

This is the first change in VAT since the big computer boom, how many systems are really ready?

***Update***

Before Christmas, I noticed that NEXT had placed notices all around the till area stating that they were passing the cut on to their customers and that the discount would be deducted at the till.

After Christmas, the same retailer had new notices saying that they had corrected all their prices so that the price on the ticket was correct. I purchased a coat before Christmas, but had to return it. When it was scanned in again, it still came up at the pre-VAT cut price (i.e. with a VAT rate of 17.5%). When I found the same coat on the rails (it was not in the sale stock) the ticket was still the 17.5% VAT rate price.

NEXT have only really provided the UK consumer with a small pre-christmas cut, and they are now pocketing the difference in VAT, as many smaller retailers were accused of doing. I am certain they are not alone.

This VAT Cut is nothing but smoke and mirrors tactics from a chancellor who is panicing.