Consumers faced with New Year VAT increase

Today is the last day that consumers can benefit from the temporary VAT rate of 15 per cent before it returns to 17.5 per cent in the New Year.

Some consumers - particularly those looking to buy expensive "big-ticket" items like furniture or cars - are likely to rush to the shops to avoid the tax hike.

But many of the bigger retail firms are expected to cushion the blow for shoppers by absorbing the 2.5 per cent tax rise themselves rather than increasing prices.

The British Retail Consortium this morning warned that the process of changing prices in shops, updating computers and altering tax returns will cost the industry up to £100 million.

And the group's director general Stephen Robertson warned that any further rise in VAT to 20 per cent or more following the general election could undermine the sector and put some of its three million jobs at risk.

Mr Robertson told BBC Radio 4's Today programme: "Absorbing the rise in VAT will hurt margins and further undermine non-food businesses' resilience, so... if businesses are to thrive they will have to reflect that, though I understand a number of businesses will not be passing on the full VAT rate immediately."

The 15 per cent rate was introduced by Chancellor of the Exchequer Alistair Darling in his Pre-Budget Report on 24 November 2008 in an effort to shore up spending on the High Street during the recession, and he said at the time it was a temporary measure which would end at the start of 2010.

Conservatives argued that the change made little difference to shoppers' spending decisions and that the £12.5 billion cost to the Exchequer over the past 13 months was largely wasted.

Retailers also complained over the bureaucratic headache of changing prices at the busiest time of the shopping year.

Mr Robertson said: "We estimate the cost will be approaching £100 million and it has come at a very difficult time of year, but at least this time it has come with a lot of notice from the Government about what is required.

"It is not just about changing shelf-edge prices but also price-marked products and there are big system changes that sit behind that, as well as the detail of returning your VAT forms. Put all that together and that is a lot of work for big and small businesses."

Mr Robertson said the BRC had detected a "gentle" improvement in the climate for shops as a result of the VAT reduction.

"It didn't make a dramatic effect, but over the course of the 13 months, we estimate it has boosted VAT-able product sales, primarily non-foods."

Spending in January can be expected to be "a little lighter" than usual as a result of the tax hike, he said.

He acknowledged widespread speculation that whichever party wins the election due by June will be forced to look at a further increase in VAT as part of the effort to reduce Britain's record annual deficit of £178 billion.

"Retail employs three million people and that kind of exercise could damage the resilience of retail and undermine those jobs, so that could be quite tough," said Mr Robertson.

"In the difficult situation we find ourselves in, we would be looking for the Government to exercise financial restraint themselves before they looked to pass on further taxation."



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