We’re all settling down after an interesting election and waiting to see how things will affect us. One of the changes which has been put forward is an increase in VAT, perhaps to 20%. The FT reports what is being proposed for VAT. This is a really bad idea for anyone who sells B2C (business to consumer). I’m going to rant a little bit now about exactly why this is such a dumb idea.

B2C businesses are unpaid tax collectors for the government. Anyone who sells more than 70k of stuff has to charge VAT on top of their prices. Of course, they take the VAT that they’ve paid for the goods off their VAT bill but this leaves a big cheque to Her Majesty, with no benefit to the business whatsoever.

VAT is a hassle

In terms of the transaction costs (or hassle, if you’re not an economist), collecting VAT at all is a major cost to businesses. How many hours are spent calculating VAT payments, filling in returns and making payments? Couldn’t we spend this time doing something which is of use to our customers or doing some marketing? Maybe we could do something real, instead of managing a complex tax system.

When the government decreased VAT temporarily for a year, the small retailers I work with had a huge job to change all the prices. Changing signs, checking all the copy on the website to make sure all the prices were accurate, amending prices to ensure that you weren’t charging silly sounding prices like £18.57 which don’t fit with pricing psychology principles. It took days, again, completely useless time. An increase in VAT will mean going through all of this again.

VAT makes things more expensive

An increase in VAT increases prices. This means that whatever you sell appears to be more expensive to the people you want to sell it to. You don’t have to be a genius to understand that increasing prices is going to put off some of the people you want to persuade to buy your lovely things. So by giving the government a bigger share of everything you sell, your business is at risk, because you’ll have to work harder for every pound you put in the till.

Less money in people’s pockets

Increasing prices means that everyone suddenly has less money in their pockets, so they’re less likely to spend it with you. Where consumers have less money, they’re less likely to spend - and this effect can be amplified, so that as soon as people think that they have a bit less money, they lose confidence and are put off spending altogether. Which affects all purchases, including B2B and non VAT rated items. Less money in the economy means a poorly functioning economy for all of us.

So we have higher transaction costs, more paperwork and hassle, a decrease in sales and a drop in consumer confidence. Could this lead us to the second part of the double dip recession some commentators have been predicting? Running a business is difficult enough at these times, without massive increases in VAT.