| Tuesday, July 20, 2010

Well, July has arrived and yesterday I was doing my quarterly tax returns on the last day (again! Must talk to my inner sergeant-major about that) and revising my invoices, noticing the new 18% VAT rate in Spain.

Will it really make a difference to consumers, business people or the government’s tax revenues? The government hopes to raise around €5bn from raising the price of coffee from €1.16 to €1.18.

Applying the new rate to my translations—language teaching is exempt from VAT in Spain—the new 18% rate will see my clients paying an extra €30 on a €1500 translation invoice (€270 vs. €240).

So what’s the big deal?

I think this will largely go unnoticed, which does not mean it will not have an effect.

Think about it—are you really going to not buy that coffee because it costs you a couple of cents more? (Even if the bar owner passes on the VAT rise to you as a customer).

If you work in a company and €1740 is an acceptable price for you to pay for translating your document—considering the value the translation represents for your company—are you really going to not translate your document because it now costs €1770?

If you look at the cumulative effect over the whole year though, it will definitely have an effect on your household or business spending—because the total VAT increase will mean you can’t spend that money on other things.

If you’re a household which spends, say, €2000 per month on rent, mortgages, cars, food, mobile phones, internet connections and all the rest, your VAT on top of that increases from €320 to €360 per month.

€40 x 12 months = €480.

€480 less per year might mean you don’t go to your favourite restaurant once a month. Maybe you cancel your gym membership. Maybe you don’t buy as many books. Maybe you give your friends and relatives fewer presents. Maybe you don’t eat as well. Maybe you shorten your yearly holiday by a week or two. Maybe you stop going to the cinema.

This, I imagine, is how the Spanish government (and the British one) hopes to raise its €5bn in extra tax revenue.

You as a consumer don’t benefit at all—you will probably spend the same money, just on fewer things.

And if you run or work in a business which is more discretionary—a gym, a restaurant or a bookshop, for example—then you might need to be more careful. If a large percentage of your clients eat, exercise or read less, you might need to be very careful.

It’s also €5bn that won’t be circulating in the economy, whether for consumer spending, investment or savings. I just hope they don’t spend it on more Plan E park painting measures.

Two other thoughts occur to me: firstly, and given that the increase seems so small on individual purchases, maybe people won’t spend less, maybe they’ll just abuse their credit cards a bit more and work out how to deal with it later.

Secondly, in a country where fiscal experts reckon that the underground economy already represents nearly 25% of GDP, increasing the VAT rate—however slightly—is only going to make the standard “Do you want an invoice?” question even more frequent. Some respected commentators think VAT revenue might actually fall because of this.

The first results of the move will be available at the end of October once everyone has filed there third quarter VAT returns. We’ll have to look at what happens not only to VAT revenues but also consumer behaviour across different sectors. Stay tuned.