A Vat holiday would sink more businesses than it saves
A six-month Vat holiday for small firms, nevermind a cut in National Insurance, is not the antidote to recession. It will be impossible to recover the deferred tax.
The Conservative party has got in first with its help for small business but the speed of announcement is at the expense of thinking out the proposals.
Leader David Cameron says the cost can be funded by withdrawing investment reliefs and other changes to business taxation, but that means companies would be financing their own tax-break - or growing companies would be cross-subsidising those without expansion plans.
Like the National Insurance proposal, it also assumes wrongly that all small firms have cashflow difficulties. No business is likely to reject the offer but not all need it.
In practice, even if the government did not have to borrow to cover the cost of lost revenue, it would lose because many companies facing difficulties now will face even worse problems next year and instead of going bust owing three months Vat, firms will fail with a nine-months’ tax liability that government can never recover.
But even those companies that survive would face problems if the government tried to end the Vat holiday. Paying two quarters’ Vat in one period and another six months’ tax in a subsequent quarter – or simply asking for the whole nine-month backlog at one time - would cause far more failures than it was meant to avert.
There is no period in the foreseeable future of the business cycle in which companies that have had difficulty paying Vat as it is due could then pay their arrears. Even in the next boom, whenever that may be, business would still find it hard, probably having to borrow to pay.
It is a quick headline and a bad proposal. Anyway, consumers may understand that they have to pay Vat to finance state spending; they will not be happy paying the tax to companies that hang on to it instead of handing it to the treasury.
