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Monday, 18 May 2009

Another government fail

Another day, another deal that goes wrong because ministers don't know what they are doing. The car scrappage scheme has failed on the first day with Ford and Honda pulling out because nobody has thought through the VAT.

The government approached the car manufactureres and said, "OK here's the deal. If you drop your new car prices by a thousand pounds,, we will add another thousand, so you can drop your price to your customers."

"A 50:50 deal?", say the manufacturers, "Great!", thinking they can pass at least 25 of their 50 onto the dealers, but when they looked at the detail the government put a stop to that.

But then someone in government realised that it wasn't a 50:50 deal after all, because if the price to the customer was reduced by £2,000, the VAT charged would be £300 lower, so the government thought they were contributing £1,300 for every £1,000 contributed by the manufacturer, which they probably weren't because the whole point of the scheme was to facilitate sales that wouldn't have happened anyway, but let's move on.

So the government decided to get some of their VAT back by telling the manufacturers that their contribution to the sales price could be offset against the value of their taxable outputs, but the money they received from the government could not be treated the same way, so that a new car with an ex-VAT sticker price of £10,000 would be sold for a price of £8,000 plus VAT on £9,000. Rather than subsidising every sale the government actually makes £1,350-£1,000 = £350 on the £10,000 deal.

No wonder Ford and Honda got upset.

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