The Economic Advisor

VAT Reduction Could Be a Bigger Problem For UK Businesses Than the Millennium Bug

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The government is on the brink of announcing a cut in the UK rate of VAT from 17.5% to 15% - a move designed to have a profound effect on the whole UK economy. Unfortunately the effect may be profound - but not the desired one. It could in fact lead to the closure and failure of a large number of businesses - and a period of severe disruption in the trading for other businesses.

What may you ask is the issue? The Government appear to have overlooked one key fact - the cost and logistics of the implementation of this VAT cut. For as long as many people can remember the general rate of VAT in the UK has been 17.5%. This figure is used in calculations throughout accounting systems, on stationary and invoices and on till receipts and point of sale devices.

Some of the costs involved with the change are relatively minor - this includes re-programming of millions of point of sales devices from supermarket tills to the local corner shop. Some businesses may also have to also have to re-print their stationary. Clearly millions of spreadsheets that do VAT calculations will also need some rework.

A far more fundamental and costly issue is accounting and billing systems. As the rate of VAT has been stable for so long many computer systems - probably numerically the majority - have taken the approach that the number is a simple constant. In some cases it is a hard coded figure - in others it is a global constant for a system. It is only in some of the larger commercial systems that VAT is treated in a way that allows two different VAT rates in the same financial year. This means that core accounting and billing systems may need fundamental and extensive changes to allow for the new VAT rate. The changes could take weeks or months to implement and without these changes companies may be unable to trade as they will be unable to raise correct invo (more…)

To Spend on Cheap Oil Or Alternative Fuels?

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This is the current question that the Department of Energy is contemplated in between the transition of president changeover from Bush to Obama. Why is this question so important?

Remember, the devastation hurricane Katrina left in not only New Orleans but the oil refineries in the Gulf of Mexico in 2005? The Department of Energy under the direction of President Bush sold 11 million barrels of crude oil from the Strategic Petroleum Reserve to the oil refineries. At that time was to save the nation of a potential oil and gas crisis after the devastating hurricane. Ever since then, the Department of Energy has been sitting on $584 Million from the sale of the 11 million barrels of crude oil. Cash ready and waiting for the approval to spend!

The U.S. emergency oil reserve was created in 1975 by Congress after the Arab oil embargo crisis, crippling the U.S. and creating gas station lines with skyrocketing prices. The emergency reserve currently has 702 million barrels of crude oil in stock, but has room for another 727 million barrels of crude oil.

Here is the controversy, the Bush administration and Department of Energy would like to replenish the 11 million barrels of oil from 2005 and spend the $584 million in cash for the crude oil emergency stock. The oil prices are just as low as were in 2005 when the department sold the 11 million barrels. Throughout the year in 2008, the department was really wanting to replenish the oil into the reserve, but the price of the oil through most of the year was just too high. The department already has the approval to replenish the 7.7 million barrels loaned to the refiners in the Gulf due to hurricanes Gustav and Ike. This replenishment will take place in January through June of next year.

But wait…

There are reports that when Obama becomes president on January 20, he and his administr (more…)