Are you discounting for the VAT decrease..?

Author: Andy | Filed under: Make your website better

So, Mr Darling has dropped VAT to 15% in an attempt to give the economy a kick. Whatever you think of his policies, he’s certainly creating work for someone and given that there’s only been a week to sort it out, we envisage this weekend will be tech-heaven with IT departments working late to ensure all systems are up to date and ready to charge less come Monday morning.

But we’ve heard some worrying comments from some businesses about shortcuts they intend to take to ensure they are ready. Unfortunately, they could end up losing thousands.

Having trained as an accountant decades ago, I learned a little bit about tax calculations and so when people talk about percentages etc, I like to think I can join in on the conversation. It was when I heard the following comment, though, my ears pricked up and I realised that many people are making a very big yet almost obvious mistake.

What I heard was “We’re not going to alter the individual prices of goods, we’re just going to take 2.5% off the total when the shopper gets to the cart”.

Almost sounds too easy, I mean 17.5% (old rate) minus 15% (new rate) is 2.5%. Except it’s not.

Some will have already clicked, but others won’t see the big flaw in this logic. I’ll explain with two very simple formulas:

£100 + 17.5% = 117.50

£100 + 15.00% = 115.00

As we can see, the customer is 2.5% better off. However…

£117.50 (old price) minus 2.5% = £114.56

Reducing the shopping cart by 2.5% will actually mean a net loss for the company. OK, it’s only a bit, but one of our customers only has margins of 5%, can they afford to lose a big proportion of that simply through a shortcut?

The answer is simple but time consuming. In some cases a whole shopping cart will need to be updated, however in the long run this may actually save you money.

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7 Responses for "Are you discounting for the VAT decrease..?"

Sue
December 1st, 2008 at 1:48 pm

1

Well spotted, Chris. Although this is a relatively small amount, it could amount to significant losses for small businesses when added to the additional administrative and resource costs for making these changes (twice). Then there’s the probable hike to a higher rate of 18.5% (plus) which needs to be accounted for going forward. I will certainly pass on the message and hope that others will do the same. Many thanks.
Anonymous
December 1st, 2008 at 2:55 pm

2

Can’t you just discount at checkout by 2.1%? Like all the newspapers are carefully explaining?
admin
December 2nd, 2008 at 11:32 am

3

Yes you can, but that won’t give you the full picture. When dealing with greater discounts in the stores plus rounded up figures it doesn’t really matter about a couple of fractions of percent, however your poor accountant will have a headache if totting up at the end of the year, especially if you have a large turnover.

The only *accurate* way to work out VAT is to add it to the gross amount.
Jacob
March 21st, 2009 at 10:54 am

4

hey id like to talk with you about your blog. please email me – thanks.
admin
March 24th, 2009 at 8:35 pm

5

What would you like to know?
Kiger
July 2nd, 2009 at 7:43 am

6

found your site on del.icio.us today and really liked it.. i bookmarked it and will be back to check it out some more later ..
used purses for sale
December 25th, 2009 at 9:19 pm

7

It’s a relatively small error, but one that could indeed cost a company thousands if the sales volume is high enough. Unfortunately, it seems so reasonable to someone who doesn’t think about the math, that some companies will probably end up doing this.