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Jan

VAT Reaches 20%: Thoughts from the first day of the new rate PUBLISHED IN VAT

We have known that this was coming for many months. Most of us felt we knew it was coming from before the 2010 General Election. We now have the position that one sixth of a retail price goes to the Treasury (unless the goods are zero rated, where it is none, or exempt, where it is an unquantifiable component). What is the upshot?
 

Since I am not an economist, or behavioural analyst, any comment on the impact is just an opinion of the ordinary person in the street.  At least, at this stage in the cycle that is the case.  I advise clients on the VAT rules, and not government on the economic impact.  But there is a clear difference between me and the “ordinary person” in respect of my preoccupation with VAT.  I have no choice but to be preoccupied by it and to notice it at every turn.  But the key quality of VAT, as regards the “ordinary person” is that, once the brouhaha has subsided, he does not notice it, explicitly, at all.  He will forget about it.  He will only see “prices”.  He will not constantly notice that one sixth of it goes to the Treasury.

 

Robert Peston tweeted today, asking who would be affected more by a half percent interest increase compared to 2.5% on VAT.  Good question (perhaps semi-rhetorical, in that his point seems to be that interest increases are often very expensive to borrowers, so could easily cost more than a VAT increase), but it cannot encapsulate the invisibility of a VAT increase compared to the constant and painful visibility of interest rate increases.

 

The same is true in a comparison with Council Tax, NIC, income tax, indeed most imposts.  You notice because you submit an income tax return, receive a pay slip with employment taxes shown, or receive a mortgage statement with the interest printed on it.  You say “ouch”.  But after we all get bored with talking about a VAT hike, then we scarcely notice its imposition.  It’s true that this does not apply to car purchases (where VAT is shown, albeit the price discussions always start gross) or building a house extension (where, again, VAT is usually shown on a bill).  But everyday purchases go by unnoticed.  And if you do not like a price, you shop around for a bargain, and don’t waste time thinking “if only there was not so much VAT to pay!”.  Indeed, many products do not have VAT, such as food and books, but there are significant misconceptions as to which do and which don’t, and that implies that we don’t care, as long as the price suits us over all.

 

This morning my frothy coffee was the same price as before the increase (I will refrain from advertising which chain this was).  We shall see how long that lasts.  By not increasing it today, and perhaps waiting until much later in January (or later still, even) the vendor manages to disassociate any price increase from the VAT hike.  That gives a measure of latitude to increase the prices by more than 2.5% if desired.

 

That famous taxation paradigm referring to plucking geese with the least hissing is the reason why VAT is favoured as the tax of choice for an increase.  Not because it is regressive, nor progressive.

 

But, as paradox would have it, while the increase is inevitably in the news, it can be manipulated to advantage.  Retailers proved very vigorous over the New Year period in promoting a “beat the VAT rise” platform.  It is now reported by a major retailer that the public’s response was to “go nuts” buying things (let us hope not the zero rated things!). If retailers in general support this view, then the government will have achieved what the last government failed to do with its temporary VAT decrease (nor its preordained rebound) namely to use it to stoke up favourable consumer sentiment.

 

Now it has happened, the best thing for the economy and the country is for us to forget about VAT, and to spend our money well and wisely.  For business and charities there is an increased emphasis on mitigation which is legitimate and proportionate, as there is on accuracy (because the penalties are driven off the newly increased VAT quantums).  The consumer will settle down as long as people do not try to ramp up discontent by raising the point repeatedly.

 

I am not sure that amounts to a New Year’s resolution by yours truly, but I am thinking about that….

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