Insight Associates provide outsourced accounting and Finance Director services to ambitious and growing businesses. We work as your only resource or with existing staff to give you complete financial support including monthly management accounts, high level financial advice, robust controls and financial systems, funding and business planning, payroll & compliance, VAT returns and statutory compliance.

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Wednesday, November 26, 2008

This whole VAT thing ...

I have been watching with great interest over the past couple of days the significant furor over the announcement in the Pre-Budget Report on Monday, that the standard rate of VAT will reduce to 15% for 13 months from 1st December.

The Governments’ own press notices make it clear that they believe this measure will stimulate the economy and consumer spending. As the impact of the first change in the standard VAT rate since 1991 sinks in, it is becoming increasingly apparent that this will not necessary have that effect. In fact what it is much more likely to do is increase margins within businesses and not be passed on to the consumer.

The reason is clear, and it is in fact quite staggering that this was not seen by those making these fundamental decisions! Most retail and consumer spending is displayed inclusive of VAT, often creating “nice” numbers like £5 and £4.95. Nobody in their right mind is going to spend a huge amount of time amending these prices by what is a very small amount to create strange looking numbers (£4.89 and £4.84 in my examples) only then to have to do it all again on 1st January 2010 when the VAT rate returns to 17.5%.

Having talked with clients and other companies over the past couple of days most B2C businesses find themselves in this position and are not likely therefore to change prices – so the consumer gets no benefit. The issue is made even worse by businesses (including ours) that receive monthly standing order payments. One client has 200 a month coming in! Again, no one is going to change any of these …the admin would be ridiculous for no real benefit.

The other interesting side effect that was highlighted on one forum I read was the impact on cash flow in businesses. All VAT registered businesses that are normally in a net VAT payment position will gain a VAT cash flow advantage though their VAT quarter, as they in effect collect VAT on behalf of HMRC before they pay it over. The reduction in the VAT rate will in effect reduce this! Interesting. OK, you can argue that this money does not belong to the business in the first place, but the reality is many (if not most) businesses use this cash flow they don’t hide it away somewhere!!

So it would appear that Mr. Darling has got it badly wrong. All he seems to have achieved is creating a lot of work, a lot of confusion and ill feeling!

However, considering the practicalities …if you are concerned about how this impacts you or your business, or what you need to do to comply, give us a call 0800 180 4265 and I am sure we can help you.

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