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.