The VAT Cut – All Bark and No Bite?

The VAT Cut – All Bark and No Bite?
The VAT Cut – All Bark and No Bite?

The government’s plan to cut VAT to 15% (rather than the typical 17.5%) is being met with a resounding shrug of the shoulders by the Great British public, but is this a fair response? Should we as a nation be more enthusiastic as a result of what is effectively a tax reduction in our favour? After all, it is money in our pockets… right?

Actually, no. Not necessarily, anyway. For a start, there’s nothing to say that the retailers themselves have to pass this saving on to the customers; several retailers are choosing not to lower prices, but instead are using the extra money to pad out their profit margins and help keep themselves bundled up against the (now very real) cold wind of recession. Even though Darling has said he hopes retailers will pass on the savings to the consumer, this isn’t likely to happen, especially in smaller cases. Why? Firstly, because most people are not going to be swayed by a penny or two off the price of a small item, and secondly because the effort involved in changing the details of every item in a shop – especially those which don’t have sophisticated software – is too much to make it feasible. Imagine having to print out new labels for every item in a clothes shop. It’s just not going to happen.

Of course, even if the public had embraced the cut, would it really be that much help? Probably not. The problem is, while a 2.5% cut sounds like a big deal, it is only applicable to the things you buy. What is the benefit of a £2.50 saving on an item when you still have to spend almost £100 to get it? Sure, there are larger purchases on which the savings might be substantial (a new car, for example, on which you might save hundreds of pounds), but the whole point of a recession is that larger purchases tend to taper off, so few people will feel any real benefit. There’s always the argument that any cut is good news (after all, everyone needs essentials), but given that VAT isn’t charged on food products anyway, the average family’s weekly bill is not likely to fall by much.

While the Chancellor’s attempt to get the country buying again – and thus kickstart the economy back into action – initially looks like a step in the right direction, it ultimately seems that Darling’s fiscal stimulus is gearing up to be a bit of a damp squid… most definitely not the kind of result the UK is looking for in these financially uncertain times.

If you need any help to get tax back from the Inland Revenue, Tax Fix’s experienced team are more then happy to answer any questions or queries that you might have.

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