Fifteen percent

So what a fascinating couple of days.

Amongst the package of financial aid that is being hinted as to come in the Budget, there is a proposed decrease to the rate of VAT. 2.5% is set to come off the rate of VAT if rumours are to believed, taking it down from 17.5% to 15%.

Wow, oooo, that’s great, I said yesterday. It’s been 17.5% for as long as we can remember we concluded during a very brief conflab. That’ll really change things.

Then the cold light of day hit me and on the way into work this morning I realised, bollocks will it. Damn. More on that in a moment, complete with specific examples from my own business.

But first, the history of VAT. The idea of charging tax on retail sales was devised by a Frenchman called Maurice Lauré. What a bastard. Though I gather from my research it was first suggested by a German in the 18th Century. Sigh.

The Direction générale des impôts, was introduced with effect from 10 April 1954 for large businesses in France.

These days EU VAT is compulsory for all EU member states. The maximum allowed VAT rate is 25% and the minimum is 15%. In 1973, the UK joined the EU and VAT replaced the previous Sales Tax system.

Today, the UK charges VAT on most things at 17.5%. Certain things are exempt, others are zero-rated (such as food, books and newspapers) and others are charged at a lower rate of 5% - mostly domestic fuel like gas and electricity.

How does it work? (taken from the BBC website)

The answer to this conundrum is best displayed using an example. Perhaps we should take the manufacture of small hand-towels.

A farmer would produce the wool required to make the towel. He would sell this to the towel-maker. For this wool he may charge £100,000 plus VAT at 17.5%. The VAT on this (in the UK) would be £17,500. The towel-maker would therefore pay the farmer £117,500. Of this amount, the farmer would pay the Government £17,500 and retain £100,000.

The towel-maker can reclaim from the Government £17,500 so the wool only costs £100,000. Once the towels are made he/she would sell some of the towels to a shop for £100 plus VAT of £17.50. The £17.50 is paid over to the government.

The shop would reclaim the £17.50 from the government and sell a pack of towels for £10 plus VAT of £1.75. The £1.75 is paid to the government.

The end consumer pays £11.75 for the towels, of which £1.75 is tax. He/she is not entitled to reclaim this amount and the government gets to keep the cash.

So why is it so difficult? (again from the BBC website)

All looks quite simple doesn’t? Ah ha! Well there’s the rub. When the VAT system was devised, some goods and services were thought to be so important that you should pay less tax (or none) on them. This was done in two ways: zero rating and exemption.

Zero Rating: The retailer charges the consumer VAT at a rate of 0%. The retailer can reclaim any VAT it is charged and the goods are therefore not taxed at any time.

Exemption: The retailer charges no tax on the goods or services. However the retailer is not entitled to reclaim any VAT it incurs. Tax is therefore collected one step up the chain on a lesser amount (it does not include the mark-up made by the retailer).

So that’s VAT in a Top Gear-esque nut shell.

So a cut of 2.5% will be a big help in these hard times right?

Uh, no.

It doesn’t put any extra money in a person’s pocket for the essentials. It only saves you money when you buy something you may not need.

Food is zero rated, unless you’re dining out. Then the standard VAT rate applies. But if you’re truly on a budget, why are you eating out more than once a month if indeed that?

Newspapers, books, magazines, comic books, etc are also zero rated. So again, no price change.

Utility bills are charged at 5% so they won’t be affected. Council tax doesn’t have VAT on it obviously so no change there and rent is only charged with VAT on business rents, so homes will not be affected.

Frankly, the only bills that might come down for the average person are phone bills - both mobile and home (including internet) and travel costs.

A 2.5% cut will not make you better off. It will just save you money on stuff like DVDs, TVs, video games, sofas, washing machines, etc, etc. So, great if it comes before Christmas, you’ll save money on your Christmas shopping.

But will you really?

Again, no. Or at least probably not.

You see a 2.5% decrease in VAT doesn’t compensate how weak the pound has become in the past year. At the start of 2008 the exchange rate was comfortably near $2 to the £1. As of today it is $1.5 to the £1 according to xe.com and at points last week it was lower than that!

That’s a decrease of 25% in 12 months! Suddenly 2.5% looks rubbish, right? To those of you who haven’t caught my drift, let me elaborate. We are an island nation. Much of products we consumers buy these days comes from overseas. And a lot of that trade is done in US dollars. It was considered to be a stable currency and the USA is the biggest capitalist nation in the world, stands to reason that money tied up in their currency is safer than say Zimbabwean dollars.

So something we Brits we importing at a cost of $100 in January, was costing £50. Now it costs £66.67. That’s £16.67 more in less than a year. Distributors and retailers face the realisation they need to do the undesirable option of raising the retail price or risk destroying their gross profit margin.

Boo hoo you think, but remember gross profit is simply the pot that said company uses to pay all of their expenses. Net profit or their actual profit is calculated after all the expenses are removed. And the things that are making life hard for the general public - increased fuel prices, etc - are also affecting businesses. So retail sales are down, costs are up across the board and Government throws out a paltry 2.5% decrease in VAT?

One that’s temporary too. It has been said that the VAT rate will go back up to 17.5% at a later date.

The most that will do is allow small retailers to keep prices down over the festive period. To absorb the price increase from the falling Pound and continue to trade rather than offer any immediate discounts.

Let’s take my business for example.

If we break my business down into three areas, comics/graphic novels, games and RPG and merchandise including t-shirts, only half of my products are affected by the VAT drop.

Comics, graphic novels and roleplaying books are all zero-rated items. No VAT is charged or collected on them. So the price remains unchanged.

Toys, boardgames and t-shirts will be affected. But almost all of this product in a comic shop such as mine is imported by UK distributors from US manufacturers. So they are affected by the changing price of the Pound against the Dollar.

Last week, US games manufacturer Fantasy Flight increased all of it’s prices as well! So my supplier Esdevium informed me of the new trade prices

Their popular Call Of Cthulhu boardgame Arkham Horror went up £4.60 in one week! The resulting increase in the retail price sees it go up to £40. Of which the Government currently gets £5.96 in VAT. It used to £35 with £5.21 to the Taxman.

The cut in VAT will change that to a retail price of £40 and £5.22 of VAT. So it’s gone up £5 at the till, it’s costing me £4.60 more to buy in and the Government aid comes to a whopping 74p. Wow.

I won’t lie. The tax cut will mean I make slightly more money on a copy of Arkham Horror. About the same amount as a Kit-Kat. So whilst I could pass that on to the consumer - overlooking the fact my other overheads have increased such as electricity and my own personal living expenses - it is hardly the massive drop in price that the 2.5% VAT cut is being presented as by the media.

And the media are the ones who exacerbated the credit crunch in to a recession/economic down turn/today’s media buzz word for we’re all fucked in the first place.

Sigh.

Nice try Labour, almost a socialist idea for your first time in nearly a decade - cut 2.5% off VAT and then charge the fat cats even more.

But frankly it won’t help me or my customers. Not anytime soon.