Please Mr Darling, Give Us A Break...

It can't have escaped your notice that Alistair Darling has decreased VAT to 15% in order to save all our lives, and it can't therefore escaped your notice that has been a massive rush of folks saying 'Well done, Darling. That's just the ticket'. What? You hadn't noticed that second bit? No, well neither have we, mostly because no-one in the business world feels it will make a big difference. Trouble is there is worse news - the duty rates on tobacco, fuel and alcohol are all rising to offset the VAT decrease. And that is very bad indeed, and here's why:

The Bluffers Guide To VAT, Duty and Prices
(you may want to make a drink before reading this...)

1. How VAT Works
VAT is a purchase tax, designed to hit hardest those who buy the most, who must therefore be the richest. That's great, but as it doesn't just get applied to Armani Suits, Cristal Champagne and Jimmy Who Shoes, it is paid by all us, not just rich Hip-Hop folks like Piff Diddly and 20 Pence or whatever his name is. Companies are allowed to 'Register' for VAT, so that they can claim back the VAT on anything they buy - but by registering they then have to charge VAT on anything they sell. The upshot is that companies claim back the VAT they pay out, and hand in the VAT they collect from customers. This means that some items have gone through the VAT process 2 or 3 times before the shops get hold of them. When Mr Joe Public buys his goods, the price includes the VAT element, which is calculated as a perecntage of the basic price charged. At all times the value of VAT handled by any company belongs to Her Majesties Revenue & Customs (HMRC). If it sounds complicated it is - there is a big list of what can and can't be claimed back, and many items are exempt from VAT unless something is done with them to make them eligible. Other things (like energy for example) are charged at a lower rate.

2. How This Works In A Brewery
Anything deemed an 'ingredient' is generally exempt from VAT ('Zero-Rated'), so for us we don't pay VAT on most of our purchases in terms of beer producution, so compared to many maunfacturing industries, we don't have as much VAT to claim back - this is good because we don't have to spend as much in the first place, but also bad because we have to hand over more pro-rata at the of each VAT period ('VAT quarter'). On balance of course it is better not to pay it, but you see how difficult it becomes to glibly say how changing the rate VAT is a good or bad thing in business terms.

3. How VAT Works When Selling
If you are a shop, you collect the VAT form your customers, and pass it on to HMRC at the end of each quarter. If you don't, then you get shouted at until you do, or they take your house/car/business away (but then it was never your money, so fairs fair). You will of course have paid VAT on the stock you bought, so you take the amount you paid of the amount you collected, and pay the reulting amount. You keep records, but is generally built on trust that you do it correctly, on the basis that at somep point you will under investigation, which can be unpleasant I am told (our turn will come one day, but that is what makes it work, the knowledge that checks are made, often without much notice). What this does mean is that this collected VAT revenue is effectively in your possession for up to 3 months before it is handed over - and so many smaller companies have to use this extra money to keep their overdrafts lower, or generally help cash flow. So already, we have another issue - by dropping the rate of VAT, cashflow can be impacted in a negative way - and don't forget that any business needs to charge more than it pays, so there is in relative terms less benefit in terms of paying less VAT. And of course, if, like a brewery or many other food producers you don't pay much, if any, VAT on your raw materials, there really is little benefit, only the reduction in cashflow. And of course, on Monday 1st December every business, large or small, will have to redo their prices. In most cases, it is just a setting in some software, and a bit of checking. For a shop, it can mean new shelf labels, or worse, every item with an idividual price ticket. My guess is that in many cases you will pay less at the till than the value shown on the items in your basket, but it will vary. And of course items bought at the old rate, sold at the new one won't make any difference to the annual profitability of a business, but is an impact on cashflow, which can seriously damage a companies health. Importantly though, the general opinion in the real world is that that 2.5% reduction will, for the majority, make bugger all difference - unless of course it makes us feel more confident in spending money, and that after all is what it is about - if people don't spend, we'll get further into a recession, and if everyone offers lower prices, we get deflation, which really is a lot worse.

4. What About The Price Of A Pint Then?
At last, the bit you are interested in. Well, we don't keep the VAT anymore than the pub landlord, so between us we don't get extra cash, and whilst this won't affect us the brewery (beyond cash flow issues as above), it does mean the landlord could, if he chose, to reduce his prices. This would mean 5p off a pint currently sold at 2.70. I doubt that would make anyone drink more, but again if it makes folk happier about going down the pub, it is a good thing, as then the landlord gets more trade without losing his income, and of course we sell more beer. Trouble is, Mr Darling (bless him), really has got it in for alcohol (except spirits it seems), and so to stop alcohol (except spirits) getting cheaper, he has raised alcohol duty by 8%. This has, on the whole, been kept very quiet - and it's not just alcohol, tobacco and fuel (2p per litre) - are going up as well.

On the face of it, the figures on beer do about match - the increase and the decrease are near as damn it without happenies the same. But (why is there always a but?) we have to pay the duty out of our income, so it is an increased cost to us. If we pass it on, it is an increased cost to the landlord, and will he then swallow it (pun intended) instead? I doubt it - there really is little margin for extra cost at the breweries or the pub, so guess what? Beer prices rise. I can hear the clamour of 'If it's the same amount, then prices should stay the same - what has come off goes back on, surely?' Well, to a point that is true, (and here's that word again) but businesses work to 'Margins', which is a pecentage addition to costs that sets your selling price, and whilst there is a lot more to price setting than that, the margins a business returns are a key indicator of it's performance (but not the only one by any means). So if your margins drop, investors/managers/bankers etc etc take a dim view. Of course this is no excuse for profiteering, but it explains the less blatant examples - and of course the old chestnut of cashflow comes in as well - Duty is not reclaimable, so duty increases come out of the lanlords pocket.

As a result, I expect beer price to rise by up to 10p per pint in the pubs. For good reasons pub prices are in units of 10p - anyone who has worked a bar will tell how hard it can be dealing in multiples of 2 & 3p here and there, and how much change is needed as a result. Again, not an excuse, but an explanation at least. But (that's a third one already) I also expect that some breweries will add a bit extra on as well - margins again - and I also expect some won't bother to raise prices but elect to take a hit finacially insted. Others will pass it on, but offer bigger discounts in return. It will be an interesting few days after the 1st December, but one thing is for sure, it will be the small breweries that take the biggest hit - we can't win, but we can damn well come a good second, and sometimes you know, that is more than good enough.

Phew, no more waffle - you can go home now. And then get down the pub for all our sakes.