Today marked the beginning for the 2.5% VAT rate cut in the UK, but wait for it, the rate cut is temporary, and will only last till 31st December 2009! I mean come on Mr. Darling, surely you have to have some common sense. Will the rate cut really stimulate the economy? In my personal opinion definitely NOT! Lets put this into perspective, according to the Chancellor, the 2.5% cut will help businesses save when making purchases and consumers to buy more (increase spending). Fantastic on the face of things, but lets use some very simple LOGIC to demonstrate the flaw in this economic stimulation policy.
By reducing the VAT rate to 15% from Monday, 1st December 2008, the government has basically said for every £1.00 we spend, we will “save” £2.50! Great, not a bad “savings” in the scheme of things, but is it really a saving? From a businesses perspective this is not the case. I spoke with several business owners about this matter and read many interesting articles and blogs relating to this. Most interesting was this article on the Computer Weekly website (VAT rate cut will cause system problems, warns analyst). Personally this is very logical, and the two points below illustrate this.
Firstly, here is the MAJOR FLAW with this rate cut (I am sure many of you spotted it already). If you read the full details on the HMRC website (Pre-Budget Report 2008 – VAT Rate Changes), the fourth paragraph says it all. The 15% rate cut will only remain till the 31st December 2009, from 1st January it will revert back up to 17.5%! Surely this has got to be the biggest mistake and shambolic economic “stimulus” strategy / policy ever. I am no economist but it is very clear that the amount of money businesses will “save” from the rate cut has a huge potential to be negated on the simple fact of how much it will cost to change their computer systems, financial management software, tills, price tags etc just to factor in the VAT rate cut “saving”, only to have to put it all back up again in just over a years time! I mean come on they could have thought this through better and I am sure the had a team of economic analysts to refer to.
Secondly, the limited time to change over will be even more costly. The Pre-Budget Report was announced on the 24th November 2008, and the rate reduction is to take place from the 1st December 2008. That gave companies only 6 days to change things over. I haven’t even bothered calling my Accountant, I am sure he has been inundated with phone calls with some of his other clients asking what they should do and how they should do it! Plenty of consultants are about to make a lot of money of this, less 2.5% of course (If they are VAT registered). Not that I am a big US economic policy fan (the Credit Crunch started there as a result of their actions), but a VAT rate cut would have been simpler to implement in the US because VAT is calculated at POS (Point of Sale) in most States. In the UK VAT is already factored into most pricing consumers are presented with, thereby making it a manual process to change labels, tags, etc.
This all seems like the whole 2K issue all over again, but at least companies had a few years to devise strategies and implement the change over, here we had 6 days (2 more days at the time of posting this blog) to implement something that is only going to be valid for 1 year 1 month! The HMRC released a guide on the 24th November 2008 titled VAT – CHANGE IN THE STANDARD RATE, which effectively confirms my comments regarding how shambolic this is going to be. The Guide is only 44 pages long which is fine and easy to read, but going through it you instantly realise the ramifications of all this.
