VAT: are we about to have our cake and eat it?

So, is Alistair Darling going to kick start the economy by cutting VAT from 17.5% to 15%? And if he does, what difference will it make?
VAT isn't charged on stuff like everyday food, so it won’t mean much of a change to your supermarket bill.
Similarly, VAT on your home power and heating bills is only 5%. And you don't pay VAT at all on the clothes your kids keep nagging you to buy, or the prescription you take because they’ve driven you round the bend.
It's levied at the full rate on what the taxman thinks are luxuries - so £123 of the £699 you paid for that widescreen TV goes straight into the Government's coffers.
Which means that if VAT is cut back to 15% (the rate it was back in 1991) the price of that TV should drop to £681. Not a massive difference, but if you put that together with other measures he's expected to take - and the fact that retailers are cutting prices anyway - it might tempt a few people back into the shops in the run-up to Christmas.
What does it mean for businesses? Not much if your annual turnover in VAT-able products or services is less than £61,000. Businesses don't have to register for VAT below that level. Above it, there could be some useful savings in the production-wholesale chain.
Some very rough maths. If Mr Darling does cut VAT back to 15% it will punch a big hole in Government finances. VAT is charged on so many different goods and services that, at its current rates, it was projected to raise more than £80 billion last year. Chop 2.5% off the full-rate VAT collected on what we buy and - even taking into account those goods that stay at the same lower rate - Government coffers could lose out by significant single-digit billions.
So a 2.5% cut in the VAT rate equates to much bigger percentage drop in revenue. You don't need to be an accountant to realise this is a BIG decision.
Incidentally, the taxman's definition of a luxury was once expressed as this: while an ordinary biscuit or cake isn't a luxury, something with chocolate on top is.
The logic was tested at a tax tribunal when McVities challenged the taxman's decision to classify its chocolate-topped Jaffa Cake as a luxury and slap VAT on it.
McVities baked a special 12-inch Jaffa, took it to the tribunal, and the chairman decided it tasted more like an ordinary cake.
This is why, whatever Alistair Darling decides on Monday, you can already have your cake and eat it.