A few weeks ago, in the attempt to avoid a full blown recession, the Chancellor of the Exchequer reduced VAT from 17.5% to 15%. a whole 2.5% off, roughly translating to the equivalent of two pence off from every pound spent on non VAT rated items. It's intended to be a temporary measure, a way to kick start the economy.
And retailers have had a field day with it. Sticking up giant signs indicating prices have gone down, and advertising the fact as much as they can, as to them they're not losing any money. For them it's a God send, as wave after wave of mis-informed people went to the shops, thinking they were getting a bargain, when really, the only way to make any major saving is to spend ridiculous amounts.
See, if you only save two pence in the pound, then you only save two pounds for spending one hundred. To save just a tenner you need to spend £500, on something that actually had VAT attached to it. Which as many people will tell you, is stupid, as people are rushing out to spend money thinking they're getting a bargain, when they aren't really.
The people telling you this are the true morons ladies and gentlemen. You see, as I said above, the very reason for the VAT cut was to encourage spending, as it has done. The intelligent person whose telling you that these people aren't saving as much as they could is correct, but what he's forgetting is that the main aim of this exercise isn't to create bargains, but to increase sales.
You see, VAT is a more complicated tax than you think. For one, not everything is eligible for it. Food, children's Clothes, children's shoes, medicines, and a couple of other things are exempt from it. Secondly, and the thing many people aren't aware of, is that it's added at every stage of production.
Lets use a very simple example. There's a product called "Product X". Now to make Product X, you need to buy the raw materials, then make it and sell it to retailers, who then sell it to consumers. VAT is added at every stage. Imagine there's no expenses in making it, and no additional costs for this simple example.
Now the raw materials cost £100 to buy plus VAT. VAT is then added on to Product X as it's sold to retailers. Retailers then add more VAT to sell it to the customers. Now at 17.5% VAT the costs work like this:
However, the important part here is that all the companies involved also save a bit of money. While all VAT charges are passed on to the final user, these companies will save money not only on production and materials, but also in terms of there energy usage. Now while on the £100 scale a 2.5% drop is not a lot, on the multimillion pound industry scale, a drop of 2.5% is a difference of millions upon billions of pounds.
And that's what's going on with the VAT drop. The whole idea is to save people money, and simultaneously encourage them to spend. This will only work if the general populace are stupid enough to believe that on there small scale they're making massive savings.
Thankfully, the majority do seem that dumb.
And retailers have had a field day with it. Sticking up giant signs indicating prices have gone down, and advertising the fact as much as they can, as to them they're not losing any money. For them it's a God send, as wave after wave of mis-informed people went to the shops, thinking they were getting a bargain, when really, the only way to make any major saving is to spend ridiculous amounts.
See, if you only save two pence in the pound, then you only save two pounds for spending one hundred. To save just a tenner you need to spend £500, on something that actually had VAT attached to it. Which as many people will tell you, is stupid, as people are rushing out to spend money thinking they're getting a bargain, when they aren't really.
The people telling you this are the true morons ladies and gentlemen. You see, as I said above, the very reason for the VAT cut was to encourage spending, as it has done. The intelligent person whose telling you that these people aren't saving as much as they could is correct, but what he's forgetting is that the main aim of this exercise isn't to create bargains, but to increase sales.
You see, VAT is a more complicated tax than you think. For one, not everything is eligible for it. Food, children's Clothes, children's shoes, medicines, and a couple of other things are exempt from it. Secondly, and the thing many people aren't aware of, is that it's added at every stage of production.
Lets use a very simple example. There's a product called "Product X". Now to make Product X, you need to buy the raw materials, then make it and sell it to retailers, who then sell it to consumers. VAT is added at every stage. Imagine there's no expenses in making it, and no additional costs for this simple example.
Now the raw materials cost £100 to buy plus VAT. VAT is then added on to Product X as it's sold to retailers. Retailers then add more VAT to sell it to the customers. Now at 17.5% VAT the costs work like this:
- £100 for raw materials with VAT is £117.50
- £117.5 for selling to retailers plus VAT is £138.06 (technically it's £138.0625 but accounting principles mean you always round VAT down)
- £138.06 for selling to customers plus VAT is £162.22
- £100 for raw materials with VAT is £115
- £115 for selling to retailers plus VAT is £132.25
- £132.25 for selling to customers plus VAT is £152.08
However, the important part here is that all the companies involved also save a bit of money. While all VAT charges are passed on to the final user, these companies will save money not only on production and materials, but also in terms of there energy usage. Now while on the £100 scale a 2.5% drop is not a lot, on the multimillion pound industry scale, a drop of 2.5% is a difference of millions upon billions of pounds.
And that's what's going on with the VAT drop. The whole idea is to save people money, and simultaneously encourage them to spend. This will only work if the general populace are stupid enough to believe that on there small scale they're making massive savings.
Thankfully, the majority do seem that dumb.
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