Blog: Leonie BarrieWill tax cuts make a difference?

Leonie Barrie | 25 November 2008

There’s been a mixed reaction to the package of emergency measures unveiled by the UK government yesterday in an attempt to kick-start the economy. Perhaps most controversial is the decision to try to revive the high street by cutting VAT by 2.5% until the end of 2009.

The cut, from 17.5% to 15% would effectively mean a GBP2.50 reduction on every GBP100 spent – but this is seen as a drop in the ocean by many analysts. They point out that some high street retailers such as M&S and Debenhams have already cut prices by more than 20%, so another small reduction will make very little difference.

The fall in the price paid by shoppers will be just GBP1 off a GBP50 jumper, or GBP5.30 off a GBP249 M&S Autograph men’s suit. The cut will make no difference to children’s clothing and footwear which is already VAT exempt.

The British Retail Consortium fears that not only are retailers likely to be selective in how they pass on the VAT cut to their customers, but the effective tax rise when it is reimposed again will actually dampen the scale of the recovery.

It also warns that implementing a new VAT rate in just a week (the changes apply from 1 December) will be a logistical nightmare for retailers at their busiest time of year. Every shelf label will need to be replaced and prices on packs and hang-tags stickered over. Communicating price changes and setting a round number price point will be difficult, as will handling customer refunds.

Not to mention changes to IT systems, particularly financial management and enterprise resource planning (ERP) applications. It is not just a matter of re-pricing goods on the shelves and Point of Sale systems, says Angela Eager, senior research analyst at IT consultancy Butler Group.

It means making, checking, and testing changes throughout the entire inventory, the up and downstream supplier network (catering for different change timelines of the various suppliers within the chain), and in back office systems and related processes such as financials and ERP systems.

And the run-up to the Christmas shopping frenzy is a time when businesses need to concentrate on handling volume transactions instead of altering their core systems.

One estimate puts the cost of implementing the temporary VAT cut at GBP176.5m – followed by another GBP127 million in 2010 when the rate reverts to its usual level. Which means any short-term benefits will be completely cancelled out.



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