This week, we’ve seen Chancellor Alistair Darling cut VAT from 17.5% to 15% and urge retailers to pass the cut on to buyers as soon as they can. This is a cut of 2.5% on all VAT, and one that’s going to begin very soon, as it’s set to come into effect from the 1st of December 2008. However, the cut is only temporary, and will only last until the 1st of January 2010 so in fact it’s only in place for 13 months. Obviously Darling has decided that it will be of benefit to everyone to pay less VAT while we try and get ourselves back on track financially. Now this is no bad thing, and it will certainly help with the cost of things that incur VAT, but what does incur VAT?, and, will it really help most people?

Well for starters, Alcohol and Tobacco prices won’t be falling as duty on these items is going to be increased to match the VAT cut.

Food & Drink
Most food products including all unprocessed foods are exempt from VAT so basic staple foods like meat, bread, vegetables etc. won’t be affected by this reduction in VAT. Only a few food and drink products will be affected including things like cakes, crisps and some snack foods like salted peanuts – namely those food items which are considered luxury.

Clothing & Shoes
Children’s clothing & shoes do not incur VAT so there will be no change there. Adult clothing on the other hand does incur the charge as do shoes for us adults, so this is one area where we should see a drop in price.

Reading Matter
Books, newspapers, magazines, printed music, maps, talking books – all these items are exempt from VAT so this is another area where the change in VAT won’t make any difference.

Electrical Items
This is where we’ll see one of the biggest differences – pretty much all electric and electronic items from TV’s to washing machines, fridges, freezers and games consoles all have VAT added to them, so if you’re looking at buying anything like this, you should start to see shops reducing their prices on these items after the 1st of December.

Building Services and similar
This is a bit of an odd area anyway because it very much depends on the size of the company whether they have to pay VAT and therefore whether they have to include it in what they charge people. Larger companies who do pay and therefore charge VAT will be able to drop their prices a little, but small one man operations who are below the figures to need to pay VAT and therefore aren’t charging customers VAT at the moment won’t be affected. For the consumer this will make larger companies possibly cheaper to use, but for the small companies this may make things harder for them as they will be struggling to compete even more against the larger companies.

So, will it make things cheaper? Well if you’re already struggling and are just buying the basics at the moment, clothes for your kids, basic food for the table etc. then really this is not a tax cut that’s going to help a lot. If you’re a little better off and are still able to afford the odd treat, or new electrical item etc. then you will find it makes a bit of difference as you’re already buying these things, so you’ll make a saving.

Is the government’s plan a good one? That’s a really hard question, and I suppose it’s one that only time will tell on. Personally though, I’d say if you’re likely to need a new washing machine or something then maybe wait till the prices drop following the VAT cut, and then buy during those 13 months rather than waiting till 2010 when the VAT will be back at 17.5% and prices will have gone up again.

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By Vialdana