VAT

Often we complain that politicians are too distanced from the real world - and this has been specifically proved by the treasury over the cut in VAT.

They have failed to understand that companies fall into two specific categories, and they set their prices in different ways.

Companies like mine, who sell to other companies that reclaim VAT, price before VAT and then add VAT on. VAT is just a distraction, it doesn't affect what I earn or my client pays.

However companies who sell to consumers price after VAT. They pick an amount they think you'll pay, and stick that on the label. Once you've bought it they work out the VAT fraction, and send that bit to the tax man.

That's why prices are always round numbers (or nearly if some didn't knock the penny off to make it look cheaper).

For example, I've just looked up a Tefal Iron in a well known department store and it's £29. So you're paying £24.69 + VAT.

This is the basic point the chancellor has missed.

Will this Iron now be sold at £28.39? Of course not.

In the majority of cases, the change will be pocketed by the vendor and the customer will see no difference. This means that there will be no stimulus to the economy - but I suppose that leaves us in the same position we were before, right?

Wrong - because the treasury has less income. So we'll have to pay more tax to make up for that.

The end result is the government gets the same, the shops get more, and we get less.

And then it'll be even worse in 2011 when Labour plan to put VAT up to 18.5%. More here