Every day, 1st Contact helps local businesses with their finance, tax and accounting issues. We understand better than anyone how the current economic downturn is really affecting the business community. We are running a series of news articles focusing on the issues that influence smaller companies, issues that the media often fail to highlight.

If you are a VAT registered company, then it is likely you would have been affected by the December 1 VAT cut which came into force as a result of the Pre Budget Report in November 2008. Four months down the line, is it really having any effect?

The strategy has been the subject of some criticism as to whether it has had any effect on stimulating the economy. This week, the Governor of the Bank of England made it clear that there was no room for further stimulus measures - so has the VAT cut been a big waste of time, money and effort?

The Government believe that the overall benefit over the 13 month period of reduced VAT will be to put £12.4 billion into the economy. The government also believes that it is too early to assess whether it has been a successful policy. Harriet Harman, speaking in place of the Prime Minister during PM Questions this week, claimed that the VAT cut had put £275 into the budget of every family in the country, although opponents claim that this is not the case, as the average family is concerned with food, children's clothes, and the mortgage - none of which are subject to VAT.

At the time of being introduced the VAT cut would have meant an administrative nightmare for many firms, as it was implemented at the busiest time of the year, with just a few days notice. The British Retail Consortium (BRC) estimated that the additional administrative & labour costs associated with re-pricing would have been in the region of £90 million. The BRC has requested that the VAT cut be extended beyond the current proposed end date of 31 December 2009. This is the busiest time of year for most retailers, so the BRC is suggesting that the reversed VAT rate be implemented at least 1 month later at the end of January 2010, so that retail firms are able to concentrate their efforts on sales rather than another massive repricing exercise.

There is also evidence to suggest that not all firms have been passing on the cut in VAT. The Office for National Statistics have reported that shops that were passing on the VAT cut in December were not doing so by the time February arrived. There are also a number of well known retailers that did not implement the cut in the first place. Many stores were already advertising massive pre-Christmas discounts of up to 75% so the VAT cut would have made very little impact.

Among critics of the VAT cut, has been French president Nicolas Sarkozy. In a recent interview, he openly criticised the move, saying that it had brought no progress. The Dutch Finance Minister, the Prime Minister of Luxembourg and the German Finance Minister have also made negative comments about the strategy. No other EU members have cut VAT.

In addition, a recent poll by The Federation of Small Businesses of more than 4000 members showed that 97% of its members had not seen any positive effect on business from the VAT cut.

If you have any concerns or require any assistance with matters concerning VAT, please don't hesitate to discuss your needs with 1st Contact, we are here to help with any accounting issues.

1st Contact Tax offers Specialist tax services to contracting professionals these services include: Contractor Accounting, Personal Tax for Contractors, Limited Companies for Contractors and Contractor Financial Advice.