Thursday, June 16, 2011

Ed Balls does an Alan Johnson....

Words fail me. Shadow chancellor Ed Balls has called for a temporary emergency cut in VAT to "boost consumer confidence and jump-start the economy".

Even though it's only Thursday I am sure this will qualify for my Tax Mistake of the Week award.

Let's ignore the fact that Mr Balls has made no suggestion as to how he would fund the £12billion a year cost of a 2.5% cut (being the amount due to be raised when the rate went up in January).

Let's ignore the fact that small businesses are hit worst because of the associated costs (time and money) of implementing price reductions caused by temporary reductions in the rate of VAT.

Let's ignore the fact that few retailers would pass on any rate cut in full as their margins are already so tight - such that they would take the opportunity to either keep prices constant or increase their margins.

Let's ignore the fact that the related complexities and cut-offs around the date on which VAT rate changes give rise to mistakes that allow HMRC to penalise hard working small businesses who have typically done their best despite the inherent complexities in the system.

Beyond all of those points Mr Balls has revealed that he simply doesn't understand how VAT works. Reports of his speech suggest he said, of a reduction in the rate of VAT:
"It has an immediate impact on people's purchasing powers or the bottom line of businesses."
But it doesn't. Businesses collect VAT for the Government and pay this over after deducting the VAT they pay on the costs of running their business. Reducing the rate of VAT will NOT have ANY impact on the bottom line of most businesses.

As Shadow Chancellor Mr Balls really should have known better. At this rate he may have to go the way of Alan Johnson who famously got the National Insurance rate wrong during an interview, and wrongly claimed VAT is charged on food.

Ed Balls therefore gets my award for "Tax Mistake of the Week".

Nominations for next week have opened early...

1 comment:

  1. Very good takedown, Mark (though, and I hate to defend Mr Balls, by 'impact on bottom line' he might have been referring to the effect of supposed increased sales that come from a lower cost to the consumer. Though then again he should have said 'top line' in that case. And he would have been wrong anyway, for the reasons you mention).

    I'm enjoying reading your stuff - you have an unusually sensible take on Twitter etc for accountants!