Worst fears confirmed

[Howard Graham]

Further to my postings on numerous sites in advance of the Chancellor’s pre budget hearing, and as all the Sunday newspapers predicted, VAT has been reduced from 17.5% to 15% with effect from 1 December.

I sympathise with the Chancellor. He needed to do something to have some immediate impact and there was probably no other way that would appear to be as dramatic. Like many things in the modern world, perception is perhaps more important than reality. The perception to many people up and down the country who perhaps don’t fully understand these things is that there has been a major cut that will reduce prices. The drop in VAT from 17.5% to 15% is only worth under £2.50 for each £100 spent. For a £20 item, the saving is under 50p. Furthermore, I have some real concerns as to whether the retailers will pass these savings on at the lower level. The administration costs of changing price labels on goods will far outweigh the benefit.

No, the perception is the key here. The Chancellor has in my opinion gambled that this announcement, which at first sight seems so dramatic, is going to kick start consumer confidence. The reality will unfold over the coming weeks and months. I would actually like him to be right, but I have my doubts. What I fear is that the immediate effect will be a splurge in the run up to Christmas, but January could be a very difficult month as unemployment continues to rise and people restrain their spending out of fear of the unknown.

Wearing my business man’s hat, I am more concerned about the implications of all this. Firstly, as I have already said, if retailers chose not to pass this saving on, they in fact will be something like £2.17 better off for each £100 exclusive of VAT of goods. With corporate profits under pressure, there may be some temptation; one might even say an irresistible temptation, to take such a course of action.

For those of us providing services business to business, we are all going to have to amend our systems to take account of this new rate. This is going to be have be done probably in the middle of VAT quarters, at a very short notice, (less than 1 week).

I am sure mayhem will ensue. Apart from potential VAT errors, I expect many accountants up and down the land will be rubbing their hands with glee at the prospect of having to charge extra fees for their client’s accounts to sort out a VAT mess.

 

[LINGsCARS]

The drop in VAT from 17.5% to 15% is only worth under £2.50 for each £100 spent. .

Even on the BBC and Newsnight they were saying £2.50 per £100.

No one can get this right (except the OP said UNDER £2.50, agreed).

Yes, mayhem.

Plus, it has put a big question mark over buying big ticket items (and some small stuff) like TVs, cars etc, before Dec 1st.

 

[Moneyman]

Oh bleeding fantastic. I will save a few quid and spend a few hundred on sorting out the VAT codes for everything. I am now sitting wondering about what is hidden. the income tax rate is going up by 5% for me but what about capital gains etc. I bet there is something nasty lurking about how "the rich can contribute towards the...."

The man is in total denial. "It isnt my fault" just because he didnt light the match doesnt mean it was a good idea to keep fuel in an open container.
"it will be worse if we do nothing. Did you catch that analysis of what the situation would be had Brown not changed any tax from the moment he became chancellor: slightly later spending and loads of reserves. i.e no mess.

 

[Rhyl Lightworks]

I suspect this will cause an upsurge in spending for a few days (maybe even weeks) as the public think there are going to be big price drops. Then the reality will set in, as they realise the price drops will be only marginal, in some cases none at all, and it will be back to as it was.

Is all the work this will entail for businesses really worth it?

Barrie

 

[Howard Graham]

Actually, that is a very good point.
How many cars, TV's and other high ticket items are retailers going to sell this week.
Oh dear!

 

[Moneyman]

I have just come up with a much better idea which would work far far better. Guaranteed to work. A little unfair but..
£20b is roughly £500 for everyone with a credit card....just tell the banks to stick it on every card. People with cards are the big spenders and they are bound to use it. Problem soved. Might not get you re-elected but.........

 

[Justin_B]

I have just come up with a much better idea which would work far far better. Guaranteed to work. A little unfair but..
£20b is roughly £500 for everyone with a credit card....just tell the banks to stick it on every card. People with cards are the big spenders and they are bound to use it. Problem soved. Might not get you re-elected but.........

This is a good point - any extra money needs to go to the irresponsible because they will spend it. Give a few extra quid to the wealthy and they just stick it in the bank

 

[matt.chatterley]

Actually, that is a very good point.
How many cars, TV's and other high ticket items are retailers going to sell this week.
Oh dear!

As per posters above. A lot of people are holding back from any significant purchases - even though I count myself as quite 'financially sensible' - I haven't done my Xmas shopping yet, because I'm waiting for the shops here (Jersey) to start Sunday trading for Christmas, and for them to roll out the sales!

Add to this that people on the mainland now know that VAT is being "dramatically slashed by 2.5%, in order to defibrillate the rapidly expiring economy, with retailers encouraged to pass the savings on to customers" (ack, sarcasm poisoning!), and I suspect high street sales of big ticket items will be dead for at least a fortnight.

Noone is expecting retailers to have their prices sorted on 1st Dec - so people will keep waiting, and waiting, and waiting..

 

[Howard Graham]

The more one looks at this, the worse it gets. This was a gamble by Mr Darling and I think it is going to go pear shaped very quickly.
I just don't think it is going to make any real difference to consumer spending and the small business person is going to go ape when he/she realises the admin involved.

 

[matt.chatterley]

The more one looks at this, the worse it gets. This was a gamble by Mr Darling and I think it is going to go pear shaped very quickly.
I just don't think it is going to make any real difference to consumer spending and the small business person is going to go ape when he/she realises the admin involved.

Yup.

On the one hand, I suppose sympathy is almost due for our Darling - he's in an impossible position whereby the public expect the government to "fix things" - and it's impossible to fix a problem you don't truly understand.

Don't believe anyone can honestly say that they fully understand the position (and future) of the British economy - educated guesses are the best we have!

I actually wonder if prices will go up on net, rather than down. When they introduced GST (essentially a VAT style tax) here in Jersey, prices went up FAR more than the 3% tax rate - because of the overheads involved.

I admit the overheads in introducing a whole new tax are greater than in amending an existing one, but still, for many businesses, it will not be a trivial endeavour.

 

[DuaneJackson]

For those of us providing services business to business, we are all going to have to amend our systems to take account of this new rate. This is going to be have be done probably in the middle of VAT quarters, at a very short notice, (less than 1 week).

Not going to be a problem for our customers. KashFlow will be able to deal with VAT quarters overlappingthe change. Even for those on FRS with a change in rate halfway through the period.

 

[Nickh]

I can see this causing significant problems and cost implications for retailers who will have to re-price their stock in accordance to the new VAT rate, but I suppose they should look at it as ‘short term pain for long term gain’.

So the deal is 13 months VAT reduction at a cost of £12.5bn, and personally I think it will do little to stimulate the domestic industry. Whenever we do see change, it’s the positive press that contributes towards encouraging consumer spend, however, any good press is normally counteracted by criticism which again lowers the confidence of the consumer. It’s this negative media coverage that in-part reduced consumer confidence and spend in the first place!

 

[wood1e2]

It is not going to simulate anything...business will keep the prices the same, and take an additional 2.5% in gross profit.

Just as prices at duty free shops are not cheaper than in the high street.

And in anycase prices are coming down, Adolf Brown and his gang would have been better increasing the VAT threshold, increasing stamp duty threshold on house purchases.

The higher rate of tax will be lost in expenses, so he won't gain a huge amount there.

Save money by opening up the government's outsourcing suppliers, so more than one firm is going to be able to win contracts, which would increase the demand on the civil servants reviewing new contracts, obviously could lead to disaster as they are fairly incompetent at the moment!! But it could lead to lower prices paid and better or even successful delivery of projects.

That would then lead to lower government overhead and free up more cash for fiscal incentives.

He could even abandon his hitleresque ID card desires, and save a fortune. The retinal scans I have seen work at heathrow terminal 4 or should I say that don't work are wasting money... dump them and save some money.

We the people are told to be prudent, well sending us off into the high street to pay more products on low interest cards is part of the reason he is putting the country into historic debt!!!

Why is it that businesses have to make money, whereas Government bodies don't even have to balance the books!!

The Conversatives unfortunatly are no better, they are right to object to
the budget changes, but what are they actually offering as an alternative?

The shadow treasury guy on C4 news last night offered no answers to the questions put to him, apart from Labour has ruined the country...well we know that!!!

Rant over!! Coffee and nicotine now...ooppss better wait until they are 2.5% cheaper well for the coffee anyway!!

 

[cricket]

I think you're in danger of sinking fast into the doom and bloomers brigade (bunch of old women whining).

If we have businesses, how do we attract customers? Don't we make gestures and offer discounts in order to attract that first bite at the cherry?
We know we have to dress it up to make it sound good but the logic is the same. We can't afford to reduce our prices, we just have to make it sound like we have offered a small discount to kickstart initial interest.
It's no different to all those buy now with 3 years interest credit schemes. It fools people and it makes then 'think' they're getting a good deal. Bit we all know there is no such thing as 3 years free interest. It just makes the idea of spending money more palatable.

Get on board with the chancellor and help him move the economy forwards by any means. Otherwise what is the alternative?

 

[Esk247]

its obvious to me...instead of investing in these banks why didnt they invest in manufacturing and reducing the cost of every day items plus 5% off fuel bills instead of this stupid 2.5% which is going to cost the country millions and take days to sort out...and..it only lasts a year!!!!!!!!!

one of my customers now has to change all there prices too! all 500 of the bloody things.

 

[wood1e2]

But it is like everything, we catch enough fish for us to eat, but at least 75% of that fish from the largest fish market in the UK is exported!! Which in itself is fairly good, but then we import 75% of the fish we eat!!

 

[AlanR]

Personally, i dont think the reduction in VAT is going to have any impact on Joe Public. They are not that stupid to think that a 2.5% cut in VAT is going to give them a significant increase in their pocket.

And besides, the biggest monthly outgoings for more most people are

1 Their mortgage payments - not affected by VAT
2. Food - majority is 0% VAT Rated
3. Gas & Electricity - 5% VAT not affected.
4. Petrol / Diesel - VAT reduction counter acted by increase in fuel duty. In fact by my calculations, it will go up slightly.
5. Alcohol and Tabacco - Duty increased so no impact

The rest of purchases on the whole would tend to be small-ish purchases and so the 2% reduction in VAT is not going to have a big impact (assuming that it is passed on).

Just my thoughts, happy for anybody to shoot me down.

Alan

 

I think there is a slight problem with VAT reduction.

The public think VAT should be reduced by 2.5% ,yet many products are purchased by business for one third of the retail price,hence the saving to business is only 2.5% on cost price.?

Earl

 

[cricket]

So no one thinks that it's the actual gesture of a discount somewhere that will psychologically impact on the consumer thinking they might get a bargain? How do you think female shoppers think when they go and out and spend 500.00 on their credit card because the word 'SALE' was mentioned. They spend twice as much because they think they've got a 'bargain'.

It's a gimmick designed to con the public into spending. Well done Alistair Darling for having a business sense.

 

[telemax]

its obvious to me...instead of investing in these banks why didnt they invest in manufacturing.

Manufacturing is dead in the UK because it can be made much cheaper elsewhere. If TV's, Electronics, DVD players etc were made here they would be more than double the price they are now, and we'd all have something else to complain about

 

[directmarketingadvice]

I have just come up with a much better idea which would work far far better. Guaranteed to work. A little unfair but..
£20b is roughly £500 for everyone with a credit card....just tell the banks to stick it on every card. People with cards are the big spenders and they are bound to use it. Problem soved. Might not get you re-elected but.........

It's a clever idea, but with the average credid card balance at £5,000, I think a lot of people will just be relieved that it's gone down to £4,500.

This is a good point - any extra money needs to go to the irresponsible because they will spend it. Give a few extra quid to the wealthy and they just stick it in the bank

That's the whole plan: we "need" to get the country living beyond it's means again.

(though they don't use those words)

That's why these gambles are unlikely to work.

The majority of people in this country are in too much debt. This year they got a wake-up call they're not going to forget in a hurry.

So, the more sensible ones are re-structuring their budgets so they can get their debts under control. Until they do that, I don't think they'll feel the financial freedom or sense of wealth they felt 16 months ago.

... plus a lot of that sense of wealth came from a housing bubble and the paper value of the home they think they own (but really belongs to the bank) and when will that bubble ever happen again?

Probably not for at least a generation.

IMO, it's a King Canute budget.

Steve

 

[Esk247]

Manufacturing is dead in the UK because it can be made much cheaper elsewhere. If TV's, Electronics, DVD players etc were made here they would be more than double the price they are now, and we'd all have something else to complain about

yes do you know why its more expensive though? the government tax's, health and safety, machinery costs, VAT, insurance blah blah not because it has to be more expensive!

Try and set up an engineering/manufacturing company and its not the employee costs that are the problem its the flippin insurance, tax, health and safety and other costs that they don't like to tell you about including property costs and rental being so high! if the government gave these companies reductions on tax and rental etc we may see a return of manufacturing.

how does a country work exactly????? you have your builders, engineers, they build things they get paid they spend the money in the shops and the cinemas but this country has some weird perception that if we all work in insurance and push paper around we'll make money from it! erm..no because we don't have a product.

rant

 

[Interconnect IT]

It's not all bad. Any decent accounting system can handle the change in VAT rates. Actually, it's an interesting test - if your system makes a mess of it, dump it

Worst is if you have lots of price labels and are stock heavy. Personally on old stock I'd leave everything the same, but on new stock I'd start reducing.

But I suspect it won't make anything like the difference that the increase in public borrowing is gonig to make. Sadly, public borrowing is like getting a credit card when you lose some of your income. So, if I did a part time job for a few hours each weekend and lost it, the wise thing wouldn't be to borrow to make up the difference in the hope that at some point in the future things will get better. I made that kind of dumb-ass mistake when I was 19 and struggling and when I should have tightened my belt I just kept borrowing more to deal with life's problems. I hadn't been taught how to manage money.

I learned that borrowing is only good if it gives a guaranteed immediate benefit:

Examples:

1. I need a car to go to work. I can't afford one, but if I don't have one I lose my job. Better to borrow as little as I can get away with to get to work regularly and reliable for the borrowing period.
2. My house was damaged in a storm - because of the scale of it and problem with insurance I need £10k to repair it. If I don't repair it, the house will continue to deteriorate and I'll be even worse off. Being scared of debt is a bad idea. I could sell the house, but that would cost even more than the debt in the long term. So I borrow on the best deal I can find and then I tighten my belt!

Now, what the government's doing is based on the idea that if we allow the recession to deepen it'll hurt us all more in the long run. It's too late to stop the damage - as in the house example above - so instead let's get the economy patched up as much as possible today, and to tighten our belts on some things when we start repaying.

Credit may never be doled out in the way it has been of late. But when I saw what some people were wasting their money on I think there's a good side to that. I saw otherwise sensible people increasing their debt in order to buy things they didn't need, like iron railings for their semi, big 4x4 cars for short commutes and so on.

I use a charge card because it eases my cash flow requirements. When I used a credit card I found it was ever so easy to just buy that bigger TV, or better Hi-Fi and pay it off over a couple of months... but that couple of months would end up stretched by another few months and suddenly the credit card company was making a lot of very easy money.

In a business sense, strong businesses will flourish - they won't be relying on finance vehicles to keep them going, but on good, dependable business. A rival effectively finances their websites out - the purchaser has an easy monthly fee which disguises their impressively over the top prices, and the seller gets all their money immediately. They started at the same time as us, but have about 2.5x the turnover and staff... BUT... they now face real problems if they can't get finance because their business model wasn't self-sufficient.

What we're doing for clients with limited funds is to offer a low down-payment followed by regular quarterly payments. Costs them more, and puts more risk on us, but we can charge accordingly - and that regular trickly of cheques each month pretty much covers our wages, servers and rent. But it's a sound business approach and doesn't leave us at the mercy of the banks.

 

[oldeagleeye]

The drop in VAT is just another government con trick and was probably insisted on by the EU so as yo bring us closer to convegence on tax matters. Next step will be the pound dumped in favour of the Euro and hey presto. Another magic trick called devlauation which will wipe out a lot of the borrowings.

The fact is this government think that they can get away with anything including allowing children in care to be murdered. Both the leader of Harrigay Council and the head of Child support should have been sacked and shamed but were they. No.

I remember when that moron John Major who came from ythe treasury fu--ed our economy up. Most con clubs turned his picture to the wall. My local club went one better. They tore the picture up and threw the pieces in the urinals a more fitting place for it to be and therein lies the problem. We got Brown in one corner and Green Cameron in the other.

Send the bloody pair of them up to Glasgow where they belong. Time for PR I think

 

[MRG]

Adolf Brown....... hitleresque ID card

That's funny...

 

[cricket]

Don't you think it's more the age old problem of Labour gets us into debt, the Conservatives get in, blame Labour then makes us pay for it? I speak with some experience. I'm 50 in 6 weeks.

 

[Dawg]

A nice summary:

"I may be wrong but I understand that eventually anyone earning over £20,000 will be paying more tax and anyone earning more than £150,000 will be paying more accountants."

(from the Guardian; may the Lord forgive me..)

 

[cricket]

Which is why you have to take the hard road and become as self sufficient as possible as young as possible so that you're not working to live.

 

[davidakerr]

originally posted by oldeagleeye

"Send the bloody pair of them up to Glasgow where they belong"

Darling's from Edinburgh and Brown's from Fife. What the hell has Glasgow done to deserve them being sent there. They will get no welcome in Glasgow I can assure you.

 

[Kernelpower_Ltd]

just another pointless gimmick by the government who dont give a toss about anyone other than themselves, would have been much better of cutting fuel duty.

 

[MRG]

Which is why you have to take the hard road and become as self sufficient as possible as young as possible so that you're not working to live.

Good posting!!

I've been told too many times before...'Look at the bigger picture.'

People have gotta get their money affairs in order now so we don't suffer in our later years...

 

[Esk247]

we must stop relying on this state pension thing as well...i will be putting money in to an account for when i retire in 40 odd years time! there won't be a state pension by then.

 

[gingerdad]

and of course with the vat/duty flick on fuel, my company bill has just gone up by 2.5%, just when it was coming down.

he's done a fantastic job at doing nothing. as said before the cost to business of changing all pricing and everything else is going to far out weight the 2.5% cut.

 

[Cornish Steve]

I can't believe that people are being so dismissive of a tax cut. A tax cut is good! Any tax cut is good! It means we get to keep more of own money, our hard-earned money, and the government gets to steal and waste less of it.

A 14+ percent cut in VAT can make a big difference. Imagine a family that earns $40,000 a year. Let's say $12,000 goes in income tax, national health insurance etc., and another $12,000 goes in mortgage payments. On top of that, $10,000 disappears in monthly living costs - food and clothing. Then there are utility payments and insurance of various types and the cost of driving (including petrol) - another $5,000. That leaves just $1,000 (or 2.5 percent of what is earned).

This is the figure that should be used to determine whether a tax cut helps: $1,000 (what's left for discretionary spending) and not $40,000 (from which fixed costs must be deducted). If someone saves $250 a year in VAT, that is a net increase of 25 percent in discretionary income. That can make a significant difference.

 

[oldeagleeye]

Whats this 14% cut Steve. It is 2.5% and what the bloody hell use are any tax cuts in they are taking back in the reduced tax free allowances. Now you see it. Now you don't.

Incidentally. No-one in the UK can get a mortgage on $40,000 dollars a year. That's about £25K. Max loan £75,000. Min price a 1 bed flat about £150,000. What with cheaper housing and cost of living all round especially in petrol I don't think they know how lucklt yhey are in the US . You need a bank loan to buy a steak over here. Rob

 

[DuaneJackson]

Simple vote - are you in favour of the Rate cut or against it? Vote here http://www.ukbusinessforums.co.uk/forums/showthread.php?t=88257

 

[Cornish Steve]

Whats this 14% cut Steve.

(17.5 - 15.0) / 17.5 = 14.3. It's a 14.3% cut in the tax rate.

 

[directmarketingadvice]

A tax cut is good! Any tax cut is good!

Not if it's combined with a huge spending increase that will create a debt that - even based on Darling's massively optimistic figures - is going cost us a fortune to pay off between 2011 and 2017.

That's what people are complaining about - the bill spend and tax later approach.

Steve

 

[DuaneJackson]

I can't believe that people are being so dismissive of a tax cut. A tax cut is good! Any tax cut is good!

It's not. Not if it costs more to implement it than you gain from it.

If the cut was (supposedly) indefinite then the gain would be impossible to calculate. This is supposedly a cut or a finite period of time. So very easy for people to ascertain whether the amount they'll save or the amount they'll make (as it is afterall part of the magic bullet that will fix the economy) is worth while.

 

[Cornish Steve]

Not if it's combined with a huge spending increase that will create a debt that - even based on Darling's massively optimistic figures - is going cost us a fortune to pay off between 2011 and 2017.

That's what people are complaining about - the bill spend and tax later approach.

If the spending is a wise investment, what's the big deal? Companies borrow all the time in order to generate wealth. From an economic point of view, debt is usually good; it means we're leveraging resources to grow the business. Plus, tax cuts often result in an increase in tax revenue because they create an environment in which people are willing to spend.

If, on the other hand, we're talking about shifting taxes, that's not a tax cut and I'd agree that it's a bit of a con.

Personally, I wouldn't mind VAT being increased to about 25 percent in return for the government scrapping all income and business taxes. Such a plan has been proposed in the US for some time. It rewards those who save, it generates revenue from overseas visitors, it slashes the administrative overhead associated with income tax collection, and it cuts business costs substantially.