‘Administrative nightmare’ puts business off passing on VAT cuts

By JOHN ROBERTSON

SHOPPERS in Shetland will gain little from this week’s gesture by the chancellor in cutting VAT by 2.5 per cent. When shops and businesses reopen on Monday it seems few price tags will have been lowered to take account of the sudden change because it is, as one Lerwick businessman put it, “an administrative nightmare” or, as others argue, prices need to increase anyway after traders have been absorbing big rises in their costs for months.

An extra disincentive for Shetland businesses to trim prices is that, while cutting VAT, Chancellor Alistair Darling ef­fectively increased the price of transporting all goods to remote parts by imposing an extra 2p on fuel duty from Monday.

The VAT cut was condemned this week by Shetland Retailer’s Association vice-chairman Charles Smith as “a nonsense” which would not boost the economy or get people out spending. The owner of Aspects clothes shop said: “If they think this is a fix for the British economy they are completely misguided. I just can’t see why they’re saying it is giving the man in the street more spending power. If we put up a sign in our windows saying a two per cent sale, folk would be doubling up laughing outside.”

Since Tuesday’s pre-budget report local businesses have been pondering what to do to accom­modate the sudden VAT cut, which, in practice, is only a 2.12 per cent reduction. But it seems few will have staff members spending the weekend working out new price tags to stick on goods. The VAT reduction may help sales of expensive goods, like new cars, and will be most obvious to people on bills for work such as garage repairs or jobs by builders where the lower rate of 15 per cent will be stated clearly on the invoice. Food and other essentials, such as children’s clothes, are exempt from the tax and will see no price change.

Mr Smith said he would be surprised if many retailers even bothered to go to the effort of changing prices and he reckoned the “miniscule” difference would not impress the public much anyway. He quoted one study showing a basket of goods costing £50 would be reduced by 53p.

Over at Home Furnishing, store owner Ghufar Razaq also believes 99 per cent of retailers, particularly those selling low-cost goods, will not bother changing their prices before Monday just to shave a few pence off. For an item currently costing £1 it would mean a cut of 2p, he said, or 21p off a £10 price tag, which may not be worth the time and effort. Instead, he plans to offer special promotions over Christmas which he believes will be of far more benefit to customers.

Another drawback to this week’s move is that it came with no notice at the busiest time of year for many shops and when they are carrying their biggest stock, bought in from the suppliers at 17.5 per cent VAT which they are now expected to sell on at 15 per cent VAT.

Mr Smith said: “I think people in business see it for what it is – a see-through handout which isn’t a handout at all.” He thought it would have made more sense to have cut income tax by one or two per cent and allowed the public to decide what to spend its money on.

There would also have been more acceptance of the change if the chancellor had said it would only apply from 1st April, giving businesses time to adapt, as they did for previous VAT changes. Mr Smith said: “For certain businesses it’s quite a simple thing but for a shop that’s got hundreds or thousands of items, for them to give a week’s notice is a bit naughty, to say the least.”

Isles MP Alistair Carmichael said the VAT cut was unlikely to have any impact whatsoever on struggling Northern Isles families, particularly as essential items like food are not affected. He dismissed the pre-budget report as a classic New Labour mix of small measures, giving with one hand while taking away with the other. “Alistair Darling’s fiddling with VAT will do little to encourage Orkney and Shetland consumers while his increase in national insurance payments for both employers and employees will hit all those local low and middle earners he should be trying to help. Everyone earning over £19,000 will be hit by these new proposals.”

He said the chancellor could have helped local families struggling with high fuel prices. Instead fuel duty would increase and with the VAT cut ending by 2010 the result would be yet more rising fuel prices.

The VAT change is the least of Mr Razaq’s worries as he watches the demise of giant companies in his line of business, such as MFI and Woolworth. He said the adjustments would be hard to put into practice for many retailers who have been suffering hugely increased costs from their suppliers while attempting to limit their own price rises to stay competitive and not lose customers. “If your prices are too high people are just not going to buy it,” he said.

“I don’t feel that the VAT cut is going to do enough for the consumers. When you actually think about the amount it’s gone down it’s nowhere near what the prices have risen by on most items.

Some of his suppliers have added 30-40 per cent to their prices, he said, while he could pass on perhaps only 20 per cent. He believes one major source of rocketing prices is the United States which forced China to remove export subsidy to its manufacturers, who actually make most of the world’s products these days.

From Monday, customers at Hay & Co Buildbase will see notices at the counters explaining that the VAT rate has not been changed on price tags, which currently display both the price with, and without, 17.5 per cent VAT for the benefit of trades customers. Instead the new rate will be added in at the tills. The decision not to change the labels was taken by head office in Oxford, much to the relief of local manager Jim Moar who had been expecting a bit of a nightmare with a flurry of re-labelling over the weekend on everything from screws to bath tubs.

He said the company is planning to put some prices up in January anyway and its approach was to avoid having to change its price tags twice. “It saves us a bit of hassle!”

The process will have to be gone through again after next year’s festive period when VAT returns to 17.5 per cent and, then once again if the government does carry out its recently discussed option of hiking VAT to 18.5 per cent in 2011.