Tuesday, November 25, 2008

VAT changes will HURT small businesses

Despite my comment in a previous post that I'm not a fan of instant Budget analyses I did find myself in a bizarre situation yesterday. I was providing instant comment and analysis as regards the likely impact of the VAT cut announced in the PBR. Or, as at least one radio station insisted upon describing the move, "VAT slashed". Somewhat of an over exaggeration I thought especially as many traders won't change their prices to reflect the change.

We had of course had time to consider some of the related issues as the reduction from 17.5% to 15% in the standard rate of VAT had been widely leaked beforehand.

I wasn't alone in noting the practical issues for small businesses. These are two fold:

  • No compulsion to lower prices but retailers especially may be expected to explain that they've included the VAT rate cut in any wider discounts they are offering; and
  • Significant time, effort and hassle arising from the need to recognise the rate change in their accounting records and systems.

  • Beyond this I haven't however seen any other references (yet) to the VAT nightmare before Christmas that will ensue when everyone gears up for the change back to 17.5% over the festive holiday period next year.

    The Government it seems takes a contrary view. Their impact assessment anticipates that the average cost per small business will be less than £100. This comprises £7 for familiarisation, £25 for repricing, £13 for extra bookkeeping, £25 for extra accountancy costs and £13 for system changes and upgrades. They've also allowed a further £10 for purchasing patches or upgrades to accounts packages whilst recognising that these may be provided free by software suppliers.

    Would readers of this blog care to share their views by way of comments as regards these cost figures?

    1 comment:

    1. The VAT idea was a terrible one - 2.5% reduction is hardly going to spur on the economy. It will give a boost to the retailers temporarily, but on the flip side reduces the VAT income for the Government by 14.2% - money desperately needed to prop-up the public finances.

      Once VAT increases back to 17.5%, together with the other various inflationary pressures on the economy we are going to be in real trouble - watch out for the rocketing interest rates!