Any VAT hike will hit at a fragile time

  21 June 2010

Car buyers and retailers alike have some tricky questions to ponder this week if, as seems likely, the chancellor, decides to increase VAT to 20% in his budget on Tuesday. Both the questions and the answers will be as difficult as any that Fabio Capello faces about his goalkeepers and his playing systems.

If VAT is raised it is unlikely that it will be with immediate effect. More likely it will be delayed until later this year or even early next.

Numnber 11, Downing StreetFor motor retailers, that may produce a short-term stimulus to sales in much the same way that scrappage did as buyers bring forward their purchasing plans. If the VAT increase is to be introduced at some future point, retailers would be advised to bring-out those ‘Buy now – Don’t pay later’ signs. Forget the extra inconvenience of having to keep track of when the car was ordered and which VAT rate is, therefore, applicable. Fill your boots now, in much the same way as England must do on Wednesday in their World Cup match with Slovenia.

With respect to used cars, an extra 2.5% of VAT charged on the dealer’s profit will put used car margins under pressure as well as increasing the price to the consumer.

Short-term, some car manufacturers will probably be offering to pay any VAT increase on behalf of buyers. In the long-term, however, the trade must confront the fact that a VAT rise will, ultimately, be damaging. Buyers and dealers will have to come to terms with the fact that it is going to increase the price of vehicles at a very fragile time.

In all of this, we must remember the reason for any VAT increase. It is to reduce that crippling deficit which the coalition government has inherited. Wouldn’t it have been simpler to have put a hefty tax on all those flags of St George currently billowing out of car windows? That would have netted billions.

Have a great week, both in and out of the showroom. If you have a story for us, email
Barry Hook

imageTags: Budget, profit, VAT

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