It’s a VAT trap…….

I tend to count myself as one of life’s optimists (supporting Spurs tends to do that to you), and I have no doubt that sooner or later we will be out of recession, and enjoying a period of steady, if maybe not exciting, economic growth. The creativity, determination and energy that I have seen over the past twelve months, as business people old and new have faced up to the reality of the economic situation and looked at how to improve their way of doing business, and the goods and services that they provide, has left me convinced of that.

However the accountant in me can never stop looking at potential downsides, so that I can ensure that I have some contingency plans in place to cope. One big lurking downside, along with dealing with the government deficit and the requirement to slash (there is no other word for it) public expenditure, with its consequent impact on unemployment, is the end of the VAT rate cut stimulus that the government put in place at the end of last year.

I fear that this has been forgotten among the various sightings of green shoots and the FTSE index rocketing over the 5,000 mark, but come 1st January 2010 VAT will be back up to 17.5% (or even 20%). Once again systems will need to be changed, wasting valuable time and money, but what will be more interesting is how many businesses will increase their prices as a result. I am sure that most of you will have noticed that since the much trumpeted “point of sale” VAT reductions that major store groups put in place last Christmas, prices have more or less drifted back to their pre-reduction levels. Will there be an increase in prices over and above their pre-VAT cut level, or will firms have to swallow the increase putting even more pressure on profits and cash?

Savvy businesses will have used the VAT reduction to squirrel away some cash (something that I advised clients at the time, believing that this was a better use of the rate reduction rather than adding to the discounts that were already in place for bargain hunting consumers), which they can use to support their businesses in 2010. For other businesses the VAT jump is going to be yet another hurdle for them to overcome. Hopefully it won’t be one too many.

Antony Doggwiler
ajd@orchardgrowth.com

Antony on the road (6)

Sunday

It seems that a reduction in VAT has emerged as the favourite for the main weapon to be used by the Government to stimulate the economy. (http://news.bbc.co.uk/1/hi/uk_politics/7744273.stm) I am a little sceptical as to how effective this is going to be as retailers are already falling over themselves to cut prices and tempt people to spend. I still think that lack of confidence driven by fear of unemployment will be the main reason for people not spending and unless firms boost cash flow by keeping the benefit of this VAT cut to themselves (for which they will be castigated by all and sundry) I can’t see the cut doing much to address this. Let’s see what tomorrow will bring.