 2.5% Cut in VAT not best way to boost economy says PKF
- Cut in VAT more likely to benefit those on higher income -
24 November 2008: The 2.5% cut in VAT from 17.5% to 15% by the Chancellor in his Pre-Budget Report today, is not the best way to combat the looming recession, says VAT Director Debbie Jennings of PKF Accountants & business advisers.
While it is clear that cuts in interest rates and income tax will give consumers more money to spend, a reduction in VAT will not necessarily encourage people to spend, nor benefit those most in need.
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 | Debbie explains, “Experts agree that a cut in the rate of Sales Tax in Canada did not lead to increased consumer spending. Plus, there is no guarantee that all retailers will cut the price of their products. |
“For example, this will make pricing difficult for retailers who normally offer goods at round sum prices and, in any case, many retailers are already offering much larger discounts in the run-up to Christmas. So any benefit for the rate cut is likely to be intangible and has to be seen more in the context of creating consumer confidence.”
Debbie continued, “The other point to make is that consumers will only see a direct benefit from the cut in the rate of VAT if they physically spend their money on VAT-bearing goods and services. If all you require is a home, food, water and heat, then the VAT you pay out will be a relatively small amount because homes, food and water do not carry VAT and heating only a 5% rate of VAT which remains unchanged. Therefore it is the wealthiest consumers that will get the most benefit from a VAT cut, although increases in fuel duties, tobacco and alcohol will negate any benefit of the VAT rate cut on those items.
“On the business front, those that are unable to reclaim their VAT, such as banks and insurers, will benefit directly from the cut as their operating expenses will be reduced. Most other types of business will be unaffected financially, as it is a tax borne by the consumer, although they will incur the administrative costs of changing their systems and invoices to incorporate the new rate.”
Debbie concluded, “Whether this works or not remains to be seen, but it will add to the country’s quickly increasing levels of debt. However, we would expect in future for the rate to be increased, probably to 20%, as the Government seeks to balance its books.”
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For further information, or to speak to a tax expert, please contact:
Jane Murray, PR Executive, 020 7065 0135, jane.murray@uk.pkf.com
For general enquiries please contact our switchboard on 0207 065 0000
Notes to Editors:
- PKF is a leading firm of accountants and business advisers with more than 1,800 partners and staff operating in 23 offices in the UK mainland firm, a wholly-owned financial planning company and associated offshore practices. The firm specialises in advising growing and entrepreneurial/owner-managed businesses, AIM and fully listed companies, and also has extensive experience in the public and not-for-profit sectors. Principal services include assurance and advisory; taxation; consultancy; corporate recovery and insolvency; corporate finance and forensic. The firm has particular expertise in advising sectors such as hotels and leisure; mining and resource; public sector; real estate and construction; professional practices; not-for-profit; and medical. The firm’s web site is www.pkf.co.uk.
- PKF (UK) LLP also offers financial services through its FSA authorised company, PKF Financial Planning Limited. PKF (Isle of Man) LLC is a limited liability company registered in the Isle of Man. PKF (Guernsey) Limited is incorporated in Guernsey.
- PKF (UK) LLP is a member of PKF International which is an association of legally independent firms with more than 14,650 people operating in 119 countries around the world.
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