Has VAT doomed our high streets?

Tue, 23/10/2012 - 05:00
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By Robert Farmer  We were recently given the news that over 30 retail shops close every day – suggesting that the demise of the High Street is gaining momentum. 

Many reasons are put forward for this demise but the reason we see so many empty shops is really very simple – and the reason incidentally, I got out of retailing many years ago.    

That reason being Value Added Tax.   VAT is an accountant’s tax and as such, totally ignores the reality of life in the business world in general and the retailing world in particular.    

The theory behind VAT dictates that, if a shop has a turnover of say £100 then, following the imposition of VAT at 20%, the shops turnover will rise to £120.  

Having paid the VAT element to the government, the shop's turnover, volume sales and profit remains the same.    

This might sound good in theory, but out in the real world we now encounter the first practical problem. That problem being, from where does the customer get the extra £20 to pay VAT? All too often, they don't manage to increase their profit to cover the additional 20%, and end up spending the same £100 after VAT is implemented as they did before.  

Thus the shop's overall turnover remains the same at £100 but now their volume sales and profits are down.  

VAT also ignores the first rule of commerce which dictates that, a product is to be sold for the highest amount the customer is prepared to pay.  

But when it comes to VAT the theory goes that the highest or maximum price the customer is prepared to pay is first determined, and then VAT is added on top which results in the price of the product exceeding the maximum a customer is willing to pay.  

A short anecdote, coupled with schoolboy mathematics should demonstrate this nonsensical idea. Many years ago, my business partner and I set up a manufacturing / retail company making and selling fire surrounds.    

Having produced a particular surround we then had to determine its retail price.  £100 we thought too cheap and £150 too expensive and so a retail price of £130 was decided upon.  

After a year or so of selling this surround at this price, we were then forced to become VAT registered.

According to the government accountants who thought up this tax, we were now required to add VAT to the maximum retail price of £130 bringing the price up to £156.(I would add that the VAT rate was lower at that time but for simplicity I will say it was at today's rate of 20%). 

This idea is clearly a nonsense and totally illogical for if we could have sold the surround for £156 we would have been selling it at that price from the onset.  

In reality we sold the surround for exactly the same price after becoming VAT registered as we had before viz. £130 - but now we had to pay the government some £21 in tax leaving us with just £109 with a resultant loss in profits.  

In the real world, one simply cannot determine the maximum price for something and then add to that price – for 'maximum', after all, is a term absolute.    

The result is simple – the retailer ends up paying VAT, not the customer.   Another more recent example of this phenomena, would be the imposition of VAT on hot take-away food.  

More schoolboy mathematics I'm afraid.    

A shop sells 10 ready cooked chickens each day at £5 each, with the profit on each sale being £1. At the end of the day, the shops takings are £50 with a profit of £10.  

Following the imposition of VAT the chickens are now priced at £6 – being £5 for the chicken and £1 tax.  

As the price has risen only 9 chickens are sold on the first day – for unlike High Street banks, customers cannot produce extra cash out of thin air.

This results in the shop having a turnover of £54 but a profit of only £9.    

As this example demonstrates, despite the shop's turnover being higher volume sales and profits are down.  A sure-fire recipe for disaster and bankruptcy if ever there was one – hence the demise of the High Street.  

I have spoken to ordinary customers on VAT only to be told "That's nothing to do with us, that's for shop keepers to worry about," and from retailers I am told "We don't pay VAT the customer does."

This being so, then VAT really is the tax-man's dream come true for it is a tax everyone thinks someone else pays!  

VAT however, is too good, for when it comes to tax, any tax, then the government and the tax payer must live in symbiosis.  

Tax must be paid for tax revenue is clearly necessary to run and maintain the nation's infrastructure.  If no one paid tax we would end up in the same situation as Greece.    

On the other hand, if the government takes too much tax then they are in danger of killing their symbiotic partner viz. the tax payer.    

And VAT does just that, it kills the retail sector, the result of which is shop closures resulting in a High Street full of charity shops and incidentally, a lower income for the government as these now defunct business do not now pay any tax at all.  

I can well remember saying, many years ago, that if the government got too greedy and the VAT rate ever reached 20% then that would be the end of retailing – seems I was right.   

 


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