Research suggests the VAT cut has boosted sales - but is that the whole story?

The VAT rate cut has boosted consumer spending and added £2.1bn of extra sales to the retail sector, according to new research from Centre for Economics and Business Research (CEBR). But that research may not tell the whole story, as many business owners are struggling to see any positive difference.

CEBR said that the controversial temporary cut of 2.5%, which many small business owners feared would serve only to increase the amount of red tape they had to deal with, made sales steadily increase since it was introduced on 1 December 2008.

“There was an immediate boost to the volume of retail sales after the cut was introduced,” the CEBR said. “Annual growth in retail sales accelerated from 1.6% in November 2008 to 2.6% in December. Sales growth accelerated further in January to 3.2%, and registered a marginal decline in February to 3%.”

But research by the Federation of Small Businesses (FSB) tells quite a different story. In February, a poll of more than 4,000 small firms found that more than half had seen their trade shrink in the previous two months.

In another FSB poll of 5,000 small businesses held in January, 97% of those questioned said the cut had had no impact at all.

When the cut from 17.5% to 15% was announced in November’s Pre-Budget Report, the British Retail Consortium (BRC) criticised the added work it would entail for business owners.

Its director general Stephen Robertson said implementing the change would be exceptionally difficult for customers and retailers at their busiest time of year.

So what’s the reality? Has the cut helped or hindered small business owners?

We suspect it will very much depend on personal experience. And on the original cost of products and services being offered. Will the consumer notice a difference of 2.5p on a £1 product and start wildly buying up as much as they possibly can before rates go up again at the end of the year? Probably not. But will they be more inclined to buy a new car that was £10,000 now it’s £250 cheaper? Well, that’s more likely.

Let’s not forget either that many stores are offering massive discounts just to keep people coming and buying. For consumers, many of whom are feeling the pinch but still have spending power, getting over-zealous about buy-on-get-one-free offers makes them spend more on discounted products than they would have done normally. Which may in fact account for the anomalous retail surge during the economic dip more so that the VAT rate cut.

Either way, while we appreciate that government has tried to take this measure to help small businesses, there’s still a hell of a lot more they could be doing. The Enterprise Finance Guarantee isn’t doing nearly enough of what it should be, not to mention that most small firms haven’t even heard about it.

And, most crucially, there’s still not nearly enough support and legislation in place to help small businesses receive payments in time and take action against debtors quickly enough. Late payments have increased by 40% since last year and are one of the most urgent and damning factors in business closure.

We really think that all this faffing about with VAT is not the most helpful way forward. Businesses need money and they need to be paid the money they’re owed. Not more red tape that produces dubious results.

What’s your experience of the rate cut? Do you think it’s helped at all? Leave your comments below – we’d be interested to hear your experiences.

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