The people who ultimately pay VAT are consumers – you pay VAT, I pay VAT. Those collecting VAT from us – retailers, pubs, restaurants – have two options. This usually means passing on the increase and putting up prices.
Whoever you blame for the current global crisis, the fact is that it is now payback time. The latest doses of medicine are being administered in the UK – fuel tax and VAT increases. There are differing opinions as to just how these will impact on various sectors of the economy.
The people who ultimately pay VAT are consumers – you pay VAT, I pay VAT. Those collecting VAT from us – retailers, pubs, restaurants, etc – have two options. This usually means passing on the increase and putting up prices. What is unknown is to what extent that would suppress demand for goods/services causing the economy to contract. And there are fears that some retailers may increase prices by more than the VAT increase. Especially if manufacturers pass on additional transportation costs.
If business owners fear that their market is too price-sensitive and that passing on the increase will hit sales volumes, they may try to absorb the increase. Clearly that would have a direct impact on their margins – unless they can cutback overheads, the most obvious being the wage bill.
“Borrowing your way out” of a problem used to be a potential option for businesses facing temporary problems, but with the future uncertain and lenders ultra cautious this is unlikely to be an available possibility.
Many businesses which have been struggling and are hanging on by their fingernails may find the VAT increase is the final straw. Another 2½% doesn’t sound a great deal particularly on small purchases – pence in many cases, but in fact it is an increase in the taxation rate of some 14%. It is true that many companies depend on unpaid VAT to fund cash flow. At the end of the next quarter, assuming sales volumes remain constant, potentially they will be facing a massive 14% increase in their VAT bill.
It is obvious that the increase in VAT is going to have far-reaching consequences for consumers, for businesses owners and the economy as a whole. So if you are an individual struggling financially or run a business which is facing falling sales, a huge VAT bill or other financial problems, take advice without delay about ways of trying to save your business.