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Cut VAT? Will somebody please explain

Posted Tuesday, November 25th, 2008 by Neil Edwards

So, the great white hope is a cut in the rate of VAT.

Forgive me, but aren't prices set according to supply and demand (or has the free market gone for ever too)? Every shop in the High Street is already cutting prices by 20%, 50% or more in an attempt to stimulate demand, so what difference is another 2.5% going to make?

And even if we do all feel a little warmer at the thought of paying less VAT, are we really going to spend the money or are we going to save it?

From a business perspective, I just don't see where the benefit is. We collect and reclaim VAT, so it's going to be the same exercise with a different number. Instead we'll have to make changes to our accounting software to accommodate the change, get confused by what rate to charge over the intervening period and then go through it all again in reverse in 12 months time.

The big opportunity was to defer the collection of corporation tax. We, like many businesses, have a March year end, which means we've got a corporation tax bill to pay in a few weeks time. Deferring the collection of these monies for 6 months or longer would put much needed liquidity immediately back into a large number of small businesses and reduce their reliance on the banks - who can't be counted on to help them out in any event.

We are fortunate that our liquidity is OK, but none of us knows how long or how deep the recession is going to be and when we will be tested.

All of the measures announced today will take a long time to trickle down into the pockets of businesses and their customers. In the absence of cash, the hope has to be that the budget will instill confidence, whether it's real or perceived, because that is what is missing at the moment. If consumers and businesses are confident they will buy more and the economy will start moving forward again.

Posted Tuesday, November 25th, 2008 by Neil Edwards

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