To pay or not to pay, VAT is the question

[DRT]

It has been widely reported that UK VAT is to be cut temporarily in an attempt to save the world from economic meltdown. The implications of this will be complex and far reaching but top of the list of things to consider is:

Would it make economic sense to pay the Duty and VAT on all of one's IB stock to take advantage of this short-term drop in VAT or would it be more likely that the longer term reduction in the relative value of the purchase price will prove to be of more value to the prudent port purchaser?

Derek

[uncle tom]

I doubt the rate will be cut by more than 2.5%, so perhaps not such a big deal, BUT..

The govt. really doesn't have any scope for tax cuts - all the talk of borrowing misses the point that someone has to be lending to them...

A year ago it was possible to launch a new index linked Gilt at a yield of just 0.75% to sell at par. Last month a new ILG was launched, but the yield needed to sell at par had risen to 1.25%. In June '92, when the governement then was borrowing faster than domestic sources of investment could supply, the yield rose to 4.125% (interest that has to be paid over and above the indexation for inflation)

In real terms, the govt. now looks to be on course to borrow even more heavily than Norman Lamont did in the early 90's, as tax receipts collapse. More worrying is that most of the developed world seems to be hooked on the same formula of borrowing heavily to get themselves out of the mess.

This begs the question: who has the funds to lend on that scale, and at what price?

My guess is that gilt yields will take off, ramping interest rates, and forcing governments to make a hurried u-turn away from the formula of tax cuts and heavy borrowing. This could well result in VAT having to be raised - not just back to 17.5%, but possibly to 20% and beyond. Duty rates could also be raised.

So if if the VAT rate gets dropped tomorrow, it probably would be prudent to take stock out of Bond.

Tom

[ajfeather]

I tend to agree, tax cuts are only a headline grabbing item this week and I cannot see them being sustained (ditto for some of the medium gilt prices).

If I had a lot of wine IB I would consider a partial removal but I don't so even looking at a 5% spread on what I would pay for the VAT I doubt I will be able to summon the enery to raise instructions and check the stoarge agents complete things correctly.

[JacobH]

It's much worse than we feared.

The reduction in VAT lowers the amount of tax paid on tobacco, alcohol and petrol. In addition, of course, petrol prices have come down by about 7p a litre since last month alone, so I will offset the VAT reduction by increasing those duties to an amount that will keep the overall cost to consumers the same this year.

5.111 The Government will increase the overall duty on alcohol from 1 December so that
the total VAT and duty remain broadly unchanged following the reduction in VAT to 15 per
cent. The increase in duty will be maintained when the VAT rate is returned to 17.5 per cent in
January 2010.

[jdaw1]

But duty is a fixed price per bottle, whereas VAT is ad valorem. So if the numbers offset for an average-priced bottle, then a more expensive bottle will cheapen, albeit slightly.

[JacobH]

But duty is a fixed price per bottle, whereas VAT is ad valorem. So if the numbers offset for an average-priced bottle, then a more expensive bottle will cheapen, albeit slightly.

True. My main concern is for the final sentence of the quotation from the Pre-Budget Report which will make wine proportionately more expensive in the UK in the long term. It also seems quite difficult to pin down the exact increase in duty rates from 1 December which is concerning; they wouldn't be burying it like this if it were a trivially small rise.

[Alex Bridgeman]

But take into account the effect of inflation. If this runs at 3-5% per annum for the next 3 years, this will effectively erase the effect of a 5% increase in VAT and the likely annual increases in duty that will match inflation. Since VAT is based on the original cost of the wine plus the rate of duty current at the time the wine is taken out of bond, the longer I can keep my wine in bond the less I will have to pay in real terms in VAT when I clear my wine.

Of course, if I had my own cellar or storage and didn't have to pay annual storage fees then I might to something different...