Monday, 24 November 2008

The return of 3/23?

The rumours that Gordon Brown and Alistair Darling may be reducing the VAT rate from 17.5% to 15% set me thinking about how this would or would not affect prices. Since most retail prices are quoted inclusive of VAT and are set at certain price points the decrease will probably make next to no difference for most retailers who will probably just take the extra 2.13% as extra profit, it might help offset the rumoured increases in taxation and the loss in turnover. Wholesale prices will be adjusted as most are quoted net of VAT "plus VAT at the prevailing rate", however as most businesses are Standard Rated for VAT any decrease in VAT will make no difference as it will be accounted for on the VAT return as a reduction in both input VAT and output VAT. There will be a timing difference as businesses mostly still operate on an accruals basis for VAT accounting and so will be reclaiming input VAT at the 17.5% rate whilst paying Output VAT at 15% BUT this still makes no difference to the business's profits.

The one big difference that I can see is that the magic fraction of "7/47" will revert back to "3/23"; accountants will understand what I mean... and will remember the "thrill" when it changed last time. Of course there might even be a system with multiple rates of VAT, with some goods at 15% and some at 17.5% and maybe some at 22%, but that prospect is just too exciting for words and will create much work for accountants and Sage software installers.

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