Following the Government's announcement that the rate of UK VAT was to be be reduced from 17.5% to 15% on 1st December, we (Old Pond Publishing) had three main courses of action open to us.
First, we could carry on as though nothing had happened and that the price of £15.95 (inc. VAT) that we recommended for most of our DVDs was the market price. In this case the VAT reduction would increase our margin, in line with one of the Chancellor's pronouncements that, whatever way businesses decided to act, he was 'putting revenue into the market'.
Second, we could act on the principle that a market price consists of two elements: a return to the business and a return to the Exchequer, the latter being the VAT element. In this case we would maintain the price excluding VAT and reduce the recommended retail price by the reduction in VAT return.
The third option was to accept that there were that two elements to the market price but also recognise that a strict adherence to the VAT reduction was going to lead to some 'unnatural' end prices. In the case of a £15.95 DVD this would be £15.62. So the third option was to re-price, for instance to £15.49.
In the end we have gone for Option 2. If the Chancellor keeps to his word we will have thirteen months of awkward pricing followed by a return to the market-based pricing we have enjoyed for the last ten years. We have reduced our main DVD price to £15.62 including VAT.
Will the Government keep its word in thirteen months time?
Comments