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?