Another nail in the coffin?

The IFS report on austerity and the economy has produced a sharp intake of breath from anybody who has read it. The possibility of a continued economic slump and more cuts in spending were perhaps not too much of a surprise but the prospect of VAT being raised to 25% (look forward to denials in the forthcoming Autumn statement) would kill off any short term recovery. Business to business transactions aren't affected by any movement in VAT rates simply because whilst one company pays over the VAT the company receiving the goods/services reclaims it however where the public or non-VAT registered businesses are concerned the impact of such an increase could send the economy into a downward spiral.

When the increase from 17.5% to 20% was announced many large companies put their prices up early so that the impact was lessened or took the hit themselves, I know one Japanese car manufacturer who decided to take the hit for the first year, some other businesses (Sainsbury's being one) also absorbed the increase but smaller companies and sole traders have struggled and have found their margins cut back to the bone. Anybody old enough to remember the period before VAT (fortunately I'm not quite old enough) will tell you why the old purchase tax was abolished, that was due to public outcry as it got closer to 30%.

When I mentioned the possible increase to a client on TUesday she said, "We'll just have to start wearing children's clothes then!" to which I replied I had to stop wearing children's clothes about thirty five years ago and there's no going back now!