What Happens When VAT Goes Up Again?

3 May 2009, 18:27

Most people will be well aware of what happened towards the end of last year with regard to VAT. In an attempt to help the struggling economy the government knocked the 17.5% VAT rate down to just 15% instead. The idea behind this was to encourage everyone to get out and start spending more money, as goods would be 2.5% cheaper overnight as soon as the amount kicked into play.

But of course it didn’t quite go down as some in the government thought it would. While many businesses did accept the change and start charging less for their goods, some didn’t. It was mainly smaller businesses that didn’t go for it, as the paperwork and extra work overall that it caused them – especially with so little in the way of advance notice – was too much to cope with.

And another aspect that many people were aware of was that 2.5% isn’t actually much of a discount at all. If you were paying a pound for something before, it would now cost you 97.5p – reduced to 97p in many cases, depending on which way the retailer went with that half pence.

So will we see a huge change when VAT goes back up – as it will do when next year dawns? After all the change was only set to be a temporary one, and clearly the government expects things to be back to normal by the beginning of 2010. We won’t go into the various news stories that have occurred since the VAT rate has changed, but somehow we doubt that things will be bright and breezy by then.

The chances are that the change back to 17.5% will be received as nothing more than a whimper. In fact, it has been said by some that some businesses have already returned their VAT rates to 17.5% again. They used the 15% rate to encourage more sales while the news of the reduction was fresh in everyone’s minds, and then after a while they raised them again. Not all shops have done this but those that have are already back to normal, so 1st January 2010 will probably come and go as nothing more than another New Year’s Day.

A lot of people think that the reduction in VAT was pretty much a non-event. It certainly hasn’t had the desired effect of getting everyone out and spending more money en masse. But then are they going to do that when so many jobs are going or in danger, and they are worrying about what they are spending?

This is why the VAT reduction – and the eventual return back to normal – could well be an event that gets forgotten in the fullness of time. We certainly shouldn’t expect a big fanfare or any kind of big reaction at all when the clock ticks over to New Year’s Day 2010. In the event, the change will probably be proved to have made very little difference overall at all.