Tuesday 25 November 2008

Och, that pre-budgetary stuff is all nonsense

Thank you Darling! He's made a pig's ear of it, and here's why:

Glenn Campbell on Newsnicht last night said that the VAT cut would be £10 off the price of a £400 telly and asked how that would encourage spending. A panel guest (I forget his name, sorry) said it was £12. Actually, it would be £8.52 off the price of a £400 telly, here's the sums - divide by 1.175 to remove the current rate of VAT (17.5), then multiply the result by 1.15 to add on the new rate of VAT (15%) - £400/1.175= £340.42 (rounded down) £340.42*1.15= £391.48. You could, of course, just multiply by 0.9787 to get the same result.

Anyway, that's not the point, this is the point - there will be no reduction in the price of retail goods. Shops set prices at a level that encourages sales rather than a level decided by a formula which includes VAT. For example, prices ending in 99 encourage more sales than prices ending otherwise (academics actually study this stuff) and a product's place in the range of prices gives customers an indication of its value and quality - malt whisky getting sold at the same price as Shuggie's Quality Own Brand will not sell - this manifests itself in some interesting ways. Some products will be kept at a higher price to convey an impression of quality to the consumer.

So big retail outlets won't be changing their prices, they'll just take that extra wee bit profit that Darling has offered them.
Additionally, of course, the reduction doesn't apply to anything which has VAT charged at something other than standard rate - sanitary products, domestic fuel and power, or the installation of energy-saving materials, for example.

It also doesn't apply to businesses on the agricultural flat rate scheme, and the other flat rate scheme has some businesses getting reductions and other businesses not getting any reductions. The flat rate scheme allows small businesses to pay a percentage of their turnover instead of having to work out VAT - have a look at Annexe E. Small businesses, in general, won't be seeing any benefit from the VAT reduction. You would have thought that the Government would be more interested in helping small businesses, wouldn't you?

National Insurance
Mrs Shuggie McDufflecoat has a small business. It's currently in a position where taking on an extra member of staff would help it to grow so Mrs Shuggie McDufflecoat is looking at her turnover and her costs and finds that employing a new member of staff is on the margins of affordability. The increase in NI may not be very large and it won't be coming in until after the general election (what a coincidence), but it will make it more difficult for small businesses to afford to expand, and employers thinking now about employing staff will have to take into account future costs.

The increase in National Insurance takes the employee's contribution up to 11.5% of the salary between £5,435 and £40,040 and the employer's contribution up to 13.3% - together that represents a sum equivalent 24.8% of an employee's salary between the two thresholds taken in National Insurance contributions (it reduces to 1% for the employee above the upper limit but the employer has the full whack to pay). That's before Income Tax.

You would have thought that the Government would be more interested in helping small businesses to grow, wouldn't you? Especially when we will need the growth of small businesses to help climb out of Labour's recession.

Income Tax
The cut in income tax - how good was that? Increase in the personal allowance will be £440, tax rates are staying the same (20% at this level), so the tax cut will amount to £88 a year or £1.69 a week. Stunning!

What about that restriction on the personal allowance for high earners? They'll lose personal allowance at the rate of 50% of the amount by which their income exceeds £100,000 up to a limit of half of the personal allowance until £140,000 where the thing kicks in again to remove the rest of the personal allowance.

Given that this will affect their tax liability on the lower rate and using the 2009 thresholds (since the 2010 ones haven't been set yet), the effect of this measure will be to increase tax by £647.50 (£12.45 a week) for people earning between £112,950 and £140,000 and by another £647.50 for people earning more than £152,950. The pips are going to squeak at £24.90 a week or so in 2010.

What about the increase to 45%? Well, it only applies above £150,000 (only 2% of the UK population earns more than £150,000), so you'd have to be earning £160,400 before you were paying an extra tenner a week. Of course, these earners will have lost their personal allowance.
Sin taxes
You'll notice that, while he was very clear about VAT coming down - and then going back up, Darling mentioned excise duties going up and then, well, nothing. Expect them to stay up. Darling did say that he was putting up duty to off-set the VAT reduction. Is that true?

Petrol and Diesel
Petrol and diesel will be going up by 2p a litre on December 1st (making the duty 52.35 pence on a litre of unleaded - same on diesel) and another 1.84 pence in April (I imagine the pump price will go up another full 2p).

Let's take 92.7p as the price of unleaded. The VAT on that at the moment is 13.8p. The price excluding VAT is 78.9p. Add on the 2p duty rise (December 1) so the price ex-VAT is 81.9p, the VAT on that at the new rate of 15% is 12.3p. The overall tax on petrol just went up. Add on April's rise and the VAT is 12.6p. Tax and duty on a litre of unleaded petrol will go up from the 64.1p that it is at present to 66.7p in April.

If you're on LPG instead of petrol, bad news - duty on that is going up by more than 4p in December and more than 4p in April. LPG is at 52.6p per litre, 44.8p ex-VAT. Add the 4.3p increase in duty in December and apply the 15% VAT - 56.5p and in April 61.2p. You're getting fleeced. Biofuels will pay duty at the same rate as petrol from 2010.

A business which uses motorised transport in the course of that business is going to be worse off. The costs of transportation will increase, leading to rises in the cost of food, clothes, etc. Labour - tough on businesses, tough on the customers of businesses.

The duty on a bottle of whisky will be £6.454 (more if it's stronger than 40% abv). The duty is £23.05 per litre of pure alcohol (£23.05*0.4*0.7= £6.454). It's an 8% rise, indicating that the duty previously was around £5.976, a rise of 47.8p.

VAT on the old duty was £1.046 VAT on the new duty will be £0.968. Together, old duty and VAT on the duty was £7.022 and the new equivalent will be £7.422 (there's the VAT on the rest of the product to be considered as well.

When I looked here there was a bottle of Bells for £12.99. Take off VAT - £11.055; remove the duty - £5.079 is the actual product price. Add on the new duty - £11.533; add on the new VAT - £13.263. Whisky gets more expensive. Just matching the VAT reduction? Aye, right.

Ad Valorem duty (VAT on tobacco) is going up by 4% on products other than cigarettes and up from 22% to 24% on cigarettes. Cigarettes also have a specific duty of £112.07 per 1,000 cigarettes (£2.24 per 20 packet). Duties are now:
• cigarettes: 24 per cent of the retail price plus £112.07 per thousand cigarettes;
• hand-rolling tobacco: £122.01 per kilogram;
• cigars: £169.74 per kilogram;
• other smoking tobacco and chewing tobacco: £74.63 per kilogram.
More than off-setting the VAT cut.

Heating oils:
Duty is going up on heating oils. Not by much (less than 1p per litre) but the percentage increase there is fairly large, considering that rates are currently around 10p per litre. There's the wee note in there that, in future, these duties will rise at the same rate as road fuel duty - that means the Chancellor won't have to tell people when he's putting up the price of heating their homes.

Small businesses
We've seen that small businesses won't be getting the benefits that large businesses will get from the VAT cut and we know that the fuel duty rises will hurt them. Even turning to drink has just got more expensive for them. Time for a wee look at other effects on them.

The rise in small business corporation tax has been deferred for a year - good news except that it means that small businesses will be getting hit with a tax hike just when they're trying to repair the damage done by Labour's recession.

The trading loss carry-back is good, but I'm at a loss to understand why the Chancellor thinks that this tax cut will cost the public purse money for the first two years but then bring in £15 million in the third year (page 10). How will a mechanism to allow companies to write off losses against profits in previous years bring in money?

Actually, that same table shows that the Chancellor thinks that deferring the corporation tax increase for one year will continue to cost money even after it's been implemented.
Hang on!
Let's have a look at that costings table (they're always fun):

There's a cap being put on Housing Benefit to save the Government £5m next year and £15m in each of the two following years.

There's money expected as income to the Government from increasing Class 3 National Insurance contributions (they're the voluntary ones for people who have had career breaks to top up their pensions), but the blurb says:
the Government will change the class 3 voluntary national insurance contribution rules to allow those reaching state pension age between April 2008 and April 2015 with 20 qualifying national insurance years to purchase up to six additional years from 1975-76. The package is intended to be cost neutral overall and the class 3 rate will therefore rise accordingly to £12.05 a week in April 2009.
If it's cost neutral, where's the Government profit coming from?
Darling is to defer action on income shifting which is when a person ascribes part of their earnings to another person to avoid paying a high rate of tax on those earnings. Surely that should be illegal? Not according to Darling who will spend £485 million over the next three years taking no action on it. Build you own tax cuts with your friendly Labour Government - if you're already wealthy.

He'll only spend £170 million on giving higher Child Benefit payments (for three months).

Air Passenger duty
Page 125 of the full report:
reforming air passenger duty from 1 November 2009, moving from two to four distance bands to improve environmental signals. The Government has decided not to proceed with a per-plane tax in order to ensure greater stability and protect competitiveness at a time of economic uncertainty.
It's in 2,000 mile bands (from London, of course ...) from A to D, and two rates in each band, one for the cheapest seats, one for all other seats - unless there's only one class of seat in which case the higher rate applies (is this just to do in the budget airlines?). Here's the rates from November 2009:
A - £11 and £22
B - £45 and £90
C - £50 and £100
D - £55 and £110

Yes, that extra fiver really will dissuade everyone from flying that last 2,000 miles, right enough, but why is this indicated as a cost to Government when the rates are higher than the current rates? It can only be because the per-plane amount would have brought in more money. Environmental signals indeed - are there two doctors in the house to expand on this perchance?

Well then
All in all it's a rotten move, if you're not rich you'll get a tax cut of £1.69 a week which won't help you if you need to drive because fuel is about to go up again. Nor is there any action to bring food prices down, or energy prices or any of the other costs which have become painful recently. In fact, some of the measures will increase inflationary pressures on these items.

The VAT cut is a sham - it's pitifully small and won't result in price reductions in the shops.

Small businesses won't get any VAT benefit and will have to suffer fuel price increases before their corporation tax goes up in 2010.

Nearly everyone's taxes will be going up soon, you'd have to be earning less than £17,600 for the NI contributions increases to be less than your £88 a year tax cut - and the increases in duty couple with the return to 17.5% in VAT will catch most of us one way or another.
Not a drop of imagination in sight. Pitiful!

1 comment:

Sandy said...

Actually if you look closer at the fuel , there is less vat for the hauliers to claim back.

Yup a 2% rise in road transport charges and you can be sure the hauliers will pass this on.

This is a massive own goal for Labour.

Prices will rise not fall because of this.