Will a 2.5% VAT cut make any difference?

It seems likely that the government will reduce VAT by 2.5% to 15% in the pre budget report later today, but will it make any difference?

When many shops on the high street are already having pre Christmas sales with discounts of 25% or more, but are still struggling to entice their customers to spend, it seems unlikely that a further 2.5% reduction will suddenly turn the fortunes of retailers around.

Let’s think what a 2.5% reduction means. If you spend £100, you will save £2.50 from the reduced rate of VAT.

A plasma TV costing £1000 will cost £975 after the cut in VAT rate, hardly a major inducement to buy it now, when the new year sales will probably see that TV reduced to around £800, or less, anyway.

It is with very high cost items that a 2.5% reduction in VAT will make actually a difference. For example building an extension costing £50,000 + VAT will cost a total of £58,750. VAT at 15% will reduce that total cost to £57,500, a saving of £1,250, which starts to make a difference.

The problem is, how likely are you to buy something costing around £50,000 during the next year?

So will reducing VAT to 15% make any difference to you? Will it entice you to suddenly spend, spend, spend? Almost certainly not, so what is this cut in VAT, if it happens, all about?

One Response

  1. MoneyStands 11th December 2008

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