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Tax and Spend

Posted On - 05/02/2016 08:30:47

So here we are – the end of another blog journeySo here we are – the end of another blog journey. On this one we set out to find whether you could make more money by giving some of it away. Or even by not taking it in the first place.

Nuts? Well, if you believe prevailing wisdom – that registering for VAT is bad and giving credit to business customers is good – then yes.

Problem is this wisdom is, well, not so wise…

Face value

Registering for VAT means putting up prices 20%. Businesses won't trade without credit. Plain truths - everyone says them - they're gospel. And that's the problem. They're just accepted.

Case in point: Leslie Nielson (of Airplane, Police Squad and Naked Gun?) died in January 2016. Except he didn't – he actually died in 2010. So what happened? On Jan 19th someone posted the original BBC News report of his death on Facebook. It went viral. By Jan 23rd it was covered in tributes and had over 175,000 likes. Thousands of people believed it. And thousands of people were wrong. They didn't think!

Freak incident? Nope. Joe Cocker (the musician) also died this January – except he didn't either - he's been dead since 2014. OK, but the deaths of Lemmy, David Bowie and Alan Rickman over the last couple of months have stirred people up, yeah? Nope. There are plenty of examples of this from other years. All mistaken, All wrong. All because people don't think.

Business common sense

It's an important principle when interpreting commercial contracts. And it trumps the "natural and ordinary meaning of written words" if they result in an uncommercial result.

So what? Well, this is about the dangers of taking things as-read. There's case law concerning a dispute over a large shipbuilding contract that brings this to life. Basically, what the contract said didn't make commercial sense and it got thrown out. The judge applied business common sense instead.

In business you simply can't assume things. You owe it to your business - your livlihood - to really understand them. Let's face it, if VAT's so bad how does anyone survive registration? And if giving credit's so good why isn't it on offer from everyone everywhere?

Under the bonnet

The origins of VAT go back to the 1920's, possibly earlier. But why was anyone thinking about a new tax, they've have been around for hundreds of years? Well, the issue at stake was ‘cascading' - tax levied on things made of stuff whose cost is already taxed. It was skewing and creating unfair taxation.

The breakthrough with the idea of VAT – and what makes it so clever – is that it credits businesses for the tax they've paid on what they buy. Which also rather neatly creates an incentive to pay it! But anyway, it took to the 1950's to implement VAT but when it was, bingo, tax on tax disappeared and input VAT was born.

This is where people fall down. VAT doesn't mean prices have to go up 20% at all. What's paid to HMRC is the difference between the VAT you take on sales and that you claim on purchases. And as we saw in "VAT – A Blessing in Disguise?' this means price rises of as little as 4% can cover it.

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