Value-added tax spells efficiency
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Operators should be planning administrative changes needed to comply with VAT next year, and both goods and passenger transport firms should be looking at charges and fares in the light of the changes which VAT will bring. Bus fares in particular may create practical problems.
by R. H. Grinnsiey, BCom, FIAC
VA 1.1_5E-ADDED TAX will evourage efficiency. Any company which is already running well with strong management control, giving top-quality service to its customers and receiving (as a natural result) good margins of profit. will benefit. Any other company which now totters from crisis to crisis will be hard hit.
It is also true to say that the new tax will be absolutely neutral as between own account operators and road hauliers, although some writers have expressed opinions to the contrary.
Although each company will need to take the right action to handle VAT, this is only a question of setting up an administrative routine. The firm will be an unpaid tax collecting agency exactly as it is for PAYE. There are sure to be a few teething troubles connected with the initial registration but once these are ironed out the action should be simply a part of the ordinary book keeping activities. However, it is already time for the accountant (office manager, book-keeper or boss's wife, according to the size of the business) to be looking at the new office routines and changes in printed stationery which will be needed. As soon as the legislation is introduced there will be plenty of publicity giving advice on this aspect.
Other action and planning demanded by VAT and calling for immediate attention are the questions of price fixing and of educating the customers. This is especially the case for the sections of this industry which supply services direct to the general public — the bus, coach and household furniture removal firms are the most obvious examples. For companies selling to other industrial or commercial concerns, the main point is to see that VAT does not affect them, and that their attention should go straight back to all the familiar problems of management efficiency.
To see the real importance of the new tax it is essential to understand that it is a tax on the selling price. Costs and expenses incurred by a business firm but ignoring VAT have a bearing on its ability to make a profit from a given selling price. Whether or not VAT is payable by the firm on a particular kind of expense, the VAT liability payable by the final customer is the same. Executives and directors should look at this whether they are selling direct to final customers or selling service to other firms, because it establishes a principle affecting every stage of industry and commerce.
EXAMPLES
1 Selling a service direct to a final consumer.
Mr A pays £2 plus 10 per cent VAT (£0.20)=£2.20 for a coach fare to the seaside. From his angle the fare is £2.20. To CD Ltd, the company running the coach, the fare is £2 income for itself. From this £2 it pays £1.60 (ignoring VAT) for expenses of all kinds and is left with 40p profit. Any VAT payable to suppliers whose accounts make up the company's £1.60 expenses will be set off against the 20p payable to the Customs and Excise — the whole being squared up quarterly by a single cheque to Customs covering all VAT on coach fares minus VAT on all expenses.
During the quarter in which a new coach is purchased the VAT on the new coach may be greater than the VAT on sales. This means that the balance will be the opposite way round, so a refund will be claimed from the Customs instead of sending them a cheque.
Supposing that CD Ltd could have reduced its expenses from £1.60 to £1.40 by more efficient operating or by filling more seats on every journey, its profit would have been increased by one half from 40p to 60p. The VAT liability would not have been changed in any way if its charges to the customers remained at the original £2 plus VAT.
Alternatively, suppose competition is unusually fierce and CD Ltd decides to attract more customers by reducing its fare to £1.80 plus VAT. This cuts 20p off the gross income from filling each seat but it cuts 22p off the fare from the customer's angle. He now pays £1.98 (including VAT), and this sum, psychologically speaking, is much cheaper than £2.20.
So VAT has helped CD Ltd in its price-cutting campaign. Yet, obviously, CD Ltd could not have begun to cut its fares unless it had been absolutely sound on its management efficiency and on its marketing. Extra seats are filled by conscious sales effort of which a cut in price is only one of many aspects.
2 Transport as one of the costs of manufacture.
Mr E. buys a washing machine for £100 plus 10 per cent VAT £10= £110. From his angle the price is £110. That washing machine has involved upwards of a hundred different transport operations, such as: O Raw metal from dock to foundry.
O Ingots from foundry to factory run by EF Ltd.
O Components from sub-contractors to EF Ltd factory. O Complete machine from factory to warehouse.
O Machine from warehouse to shop and from shop to customer's house.
GH Ltd is a road haulage company which carries out just one of those operations, taking the machine from the factory to the warehouse. It charges EF Ltd £3 plus 10 per cent VAT £0.30 =£3.30. To EF Ltd the price is only £3 because it recovers the 30p VAT by offset against the VAT on its sales. GH Ltd makes 40p profit on this job after paying £2.60 expenses. If it had been more efficient and cut its expenses to £2.40 it would have increased its profit by a half to 60p.
Note that it would have been of no consequence to EF, as the manufacturer, whether GH, the company which handled the transport, was an independent haulier or one of EF's own associated companies or even a department within its own company, just so long as the cost of transport was the lowest possible amount and the reliability of delivery schedules was satisfactory. VAT had no effect on its choice.
The VAT charge between GH and EF has been of no consequence to either side except for the slight administrative work of the book-keeping. It is the basic transport charge of £3 which goes to make up the final price payable by the man who eventually buys that washing machine.
If GI-I had reduced its charges to EF by 20 per cent this would have been reflected in the price-fixing calculations, and if all the other transport operations which went into creating that washing machine had similarly been reduced by 20 per cent this might well have taken as much as £10 off the shop price.
A cut of £10 in basic selling price would have meant a cut of £11 in the price actually payable by the customer, the VAT having been reduced by £1.
Efficiency is the key to being able to cut transport charges without sacrificing that vital element of profit which is the only real reason for being in the transport business.
Price fixing A review of all charges is going to be needed in readiness for the introduction of VAT in April 1973. In those sections of the industry which need Ministry permission before they can alter their prices, it is already time for them to be working on a plan for a price review to take effect at the appropriate time.
' (a) Bus fares. Fares will need to be increased to coves VAT. The rounding up or down to match decimal coinage will call for some negotiation as it may be anticipated that the Traffic Commissioners will not countenance any greater increase than will serve to cover the tax.
(b) Coach fares. Prices fixed at the coach operator's discretion will still be subject to the natural law of "What the market will bear". In districts where competition is strong the tax will exaggerate the effect of either a cut or an increase in basic charges.
(c) adustrial and commercial transport. The value-added tax will have no direcl consequence because customers will b( able to recover the tax by offset Nevertheless, the cost of transport is ar important element in the final price o: many goods, even though several morc stages of manufacture may intervenE before the product reaches the consumer The effect of either a saving or ar increase in charges will be exaggerated b) the VAT in the price payable by thc consumer. Therefore the closest possibli attention should be given to controllir4 operating costs and fixing pricei competitively.