Menu Costs of Cutting VAT

The small cut in VAT is a staggeringly inept piece of policy-making from a government that has completely lost control of public finances and which is groping in the dark for ways to stabilise demand and confidence as the lagged effects of asset price deflation take hold.

Even the UK Treasury does not expect retailers to pass on all of the decrease in VAT from 17.5% to 15%. And why should they? Many have already started offering sizeable price discounts in a bid to shift excess stock - 10% off, 25% one-day sales, 4 for 3 offers. All of these are more significant that the marginal reduction in VAT. Many consumers who do not understand percentages may be perplexed when they find out that a £100 television which used to sell for £117.50 with VAT at 17.5% and which might now retail for £115 - involves a reduction of £.50 which is a fall of 2.13%.

And for thousands of smaller businesses across the UK the menu costs of changing price lists, menus and catalogues will be an additional burden at a time of commercial distress. This article from Management Today considers some of the difficulties.

Jason Gordon from Ernst and Young sums this up well in an article in today’s Telegraph:

“This is a non-trivial thing to implement. It’s not just the cost of printing the tickets, it’s the time and cost of employing a member of staff to change all the prices, when they could be putting stock on shelves. This is right in the middle of peak trading and most retailers have more important things to juggle.”

Don’‘t forget that the VAT cut will be reversed in 13 months time bringing a fresh set of price adjustment costs. For small traders who do not have access to fully-computerised business systems this is not a trivial issue.

We read today that the government considered raising VAT to 18.5% from 2011. The same menu cost arguments apply to small increases in VAT.