20% rise in VAT could make a tough year even worse

The question of VAT rising to 20% is maybe not one of “if” but more like “when?” and according to commentators within the trade the timing of this announcement could have far reaching consequences for the motor trade.

For example it may be that if the rise were to come into effect immediately, which seems unlikely given that all the other cuts in spending which will be equally hard to stomach are likely to cause a delay until 2011, it could mean that car buyers will look to bring any purchasing decision forward.

This would obviously provide a short term feel good factor for the car business much like scrappage.

However it may not be widely known outside the business but VAT is applicable on all profits made from the sale of used cars.

For example if a car makes £2,000 gross profit (happy days!) nearly £300 of that goes in VAT at present, but if an extra 2.5% is added that will place a serious amount of pressure on used car margins.

This in turn will lead to increased retail prices for the consumer, and given that we are operating in a shrinking market the business is likely to become much tougher in the future unless the figures bandied about are exaggerated.

Watch this space.