VAT cut ‘insufficient’ to stimulate spending

The Chancellor gave consumers £12 billion back in their pockets in the run up to Christmas with his well-trailed cut of 2.5 per cent in VAT but experts were unsure if that would be sufficient to stimulate spending in the High Street.

Richard Rose, Tax Partner, BDO Stoy Hayward in Birmingham, believes the Chancellor did not go far enough.

“The reduction in the VAT rate is too small to influence consumer spending,” he said. “Moving key labour intensive services from the standard rate to the reduced rate of five per cent would not only have stimulated consumer spending further and faster but would help staunch (and possibly reverse) unemployment in those sectors.  It would have helped to create a virtuous circle.

“The VAT rate reduction will save the average customer little more than £1 per week on a £100 supermarket shopping bill – the VAT on crisps and fizzy drinks will come down but there’s no VAT on zero-rated foodstuff basics – bread, milk, meat and potatoes.

“A drop in the VAT rate will have no enduring benefit for customers – it may give a small fillip in the run up to Christmas but it won’t persuade consumers to spend more than they would otherwise have done before the PBR: and with the increase in alcohol duty it won’t even allow consumers to buy more Christmas cheer: the Chancellor has given with one hand and taken away with the other.”

Simon Littlejohns, tax partner at accountants and business advisers PKF in Birmingham, said: “The Chancellor has introduced some positive measures for businesses but has also created a tax landscape which will see others lose out. The 2.5 per cent fall in the VAT rate will – even if businesses pass this along to their customers in full – result in only small reductions in the weekly expenditure. With items such as rent and mortgage payments, food and most children’s clothing being free from VAT, the average family may not see any real benefit from what has been a costly move for the Treasury.”

West Midlands Business Council chairman, Barrie Williams, said the Chancellor should have looked beyond consumer spending in his attempts to stimulate the economy.

He said: “Today’s Pre Budget Report is right to focus on VAT cuts and boost consumer confidence. One of the worst things we could do right now is to talk the economy down because that will help no one. But the real challenge that was missed by today’s announcement is how we will keep people in work.

“Ministers often talk about getting people into work – and that is important. But the most important task is to stop more people joining the dole queues. There is now a real fear that, with shifts being cut and agency staff being the first to be laid off, the first thing that some firms may consider to stay afloat is a new round of job cuts in the spring.”

Gary Harley, indirect tax partner at KPMG, said: “Business will carry much of the burden of dealing with this change in rates. For businesses generally, they will have to bear two sets of systems changes, when the rate goes down and then returns to 17.5 per cent in January 2010. These changes are expensive, time-consuming and are coming at most businesses’ busiest time of year.

“Retailers will need to decide how to price their products, with the rate reduction taking effect in six days’ time.

“Consumers will no doubt expect them to pass on these cuts, but VAT is only one of the many complex factors which determine the price of goods.”