Is A Reduction In VAT Good News?

24 December 2008, 00:49

Everyone will know about it by now, and it has been in effect for a couple of weeks. But is the 2.5% reduction in the amount of VAT we pay on many goods and services even noticeable to many of us?

We would say that businesses are divided over the news, but in truth it seems as though most businesses are actually wondering where the benefit really was. Is this a case of the government bringing something into effect without really thinking through all the possibilities beforehand?

Many smaller businesses have said that the reduction actually made things harder for them. For starters there wasn’t a lot of notice given about the change – only a few short working days. And because some people were waiting for the VAT reduction to come into effect a lot of businesses actually saw less in the way of business and trading that week than they may have done otherwise.

But there was more to come. The short amount of notice meant that some businesses struggled to make the changes to the prices. Small shops still have several dozen products at least, and larger stores may have anything ranging into the thousands. Can you imagine changing all those prices – and only having a week or so to do it in?

In reality most stores have taken the decision to make the changes at the till. The shelf edge prices have remained the same, but when you pay for your goods you will see a VAT reduction (usually labelled as such) on the receipt. The other measure that many stores have decided is the easiest way to show the new prices is a ready reckoner which allows customers to work out what the new price will be.

The new rate will be in effect until the very end of December 2009, and it will be interesting to see whether it really will have any benefit to anyone during the next year. As this article shows, some retailers do have their doubts.

Not everyone is making the changes to their prices, and since there is no rule that says you have to, it seems as if the reduction that was promoted as a big solution is actually something of a damp squib.

Consider this, for example. Let’s suppose your favourite brand of socks costs £1.99. The amount of VAT on that item would be 35p at the 17.5% rate. VAT at 15% is 30p, so basically that pair of socks is going to be 5p cheaper for you.

Obviously that doesn’t make much of a difference, although you might appreciate the reduction more if you are spending £200. That would give you a discount of £5.

But with everyone tightening their belts anyway owing to the poor economy, it is doubtful as to whether the reduction will be a great saviour of the situation. It will be interesting to see how things progress through the New Year. But at the moment retailers will be charging 15% VAT on items they actually paid 17.5% VAT on… so that doesn’t sound like much of a good deal.