VAT increase shouldn't be a reason to buy, buy, buy

Spending now to beat January's tax rise is foolish

Next year's big music festivals got busy this week flogging thousands of tickets to eager music fans. T in the Park and V Festival were among those releasing swathes of 2011 tickets much earlier than usual. The bulk of tickets will go on sale next March. The selling point this week was that fans could buy their tickets now and save the VAT.

In the next few weeks you'll see more exhortations to spend now and save cash ahead of the VAT increase. It's set to rise to 20 per cent on 4 January as part of the Coalition Government's squeeze on our cash. The increase will add 2.5 per cent to the cost of many goods and services so buying now to avoid the higher price can, on the face of it, seem sensible.

But is spending now to save later actually a wise financial move, or is it a false economy? "It's very tempting to buy now to avoid the upcoming VAT increase, but you should remember that you are only saving money if you are buying something that you need and can afford," Annie Shaw, of the personal finance website, warns. "Anything else is simply a waste of money in the long run. You should also remember that many retailers will absorb the VAT increase in their profit margins at first so prices won't necessarily rise for the consumer immediately, particularly during the January sales period."

Ed Bowsher, of, agrees that rushing to spend now could be a mistake. "The VAT rise may not have the negative impact that so many people fear. In a competitive market, retailers will inevitably take some of the hit and reduce their margins a little," he says. "We'll probably see plenty of 'Don't pay the extra VAT' offers in January. I also suspect that the recovery has built up enough momentum now, so the VAT rise won't push us back into recession."

On the other hand a report published by the marketing firm Acxiom last week suggests UK households will be worse off to the tune of £6.2bn next year as the impact of the VAT increase bites. The average family will be £225 a year out of pocket, the report suggests. with those in Hull, Gwent, Stoke-on-Trent, Leicester and Middlesbrough set to end up worse off because of the increase.

Another report from Santander Insurance claims that millions are rushing to beat the rise. It suggests that 13.75 million UK adults (28 per cent of the population) plan to go on a shopping spree in the next few weeks in advance of the VAT increase, spending on average £650 each. Two-fifths of people plan to splash out on electronic items, such as iPods, iPads, mobile phones and TVs, according to Santander's research.

If true, that would represent an alarming proportion. With belt-tightening rife across the country the idea that millions are planning to treat themselves in an effort to save money would be monstrous, if it wasn't so laughable. What the research may reveal, however, is that people are planning to pull forward buying what they think of as bigger ticket items in order to save money.

As is often the case with spending, it's easy to persuade yourself that buying now is a good idea. But just because you want something, that doesn't mean you should buy it, and even the idea of saving a few quid shouldn't make a difference.

Take the 10,000 music fans who rushed to snap up V Festival tickets this week. (It's too late now, by the way. The deadline to apply was noon on Friday.) The tickets were priced at £165 for a weekend camping pass and £140 for a weekend non-camping pass.

Presumably, when the bulk of tickets go on sale next March they will include VAT at the 20 per cent rate. That would mean they'd be sold at roughly £168 and £143. In other words, you'd have saved around £3 by buying early and avoiding the VAT rise. Hardly seems worth the effort, does it? Especially as you could simply put the cash on deposit, earn a quid in interest, and then decide next spring whether you'd like to go to the summer festival.

In short, the most sensible advice is to ignore the VAT increase and only buy what you have already planned. However, if you have already decided to spend thousands in the spring, buying now could clearly prove worthwhile as the VAT increase effectively adds £212 to every £10,000 you spend.

So if you plan to buy a new car, an expensive UK holiday, or splash out on home improvements in the spring, paying now could mean slashing hundreds off the eventual cost.

But be wary. For starters, if you only pay the deposit for services or a holiday before the VAT increase, you'll be charged the 20 per cent rate on the balance you owe. That could tempt you to pay the full amount now but doing so could risk losing thousands if the trader or company goes bust or fails to do the work. That's particularly risky with builders.

If you can, use a credit card to pay: then you'll be protected through section 75 of the Consumer Credit Act. As long as you spend between £100 and £30,000 on a credit card, you can claim against the card issuer if the supplier goes out of business or disappears.

What do you pay VAT on?

There are three different VAT rates: standard (which is rising to 20 per cent); reduced (staying at 5 per cent); and zero (also unchanged).

Standard rate

* Charged on most business transactions, whether you're buying a car, music tickets, or paying for a service, such as an electrician

Reduced rate

* Domestic fuel and power

* Installing energy-saving materials

* Sanitary hygiene products

* Children's car seats

Zero rate

* Food – but not meals in restaurants or hot takeaways

* Books and newspapers

* Children's clothes and shoes

* Public transport

You can find a full list of VAT rates at

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Trainee Consultant - Surrey/ South West London

    £22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

    Ashdown Group: Trainee Consultant - Surrey / South West London

    £22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

    Recruitment Genius: Claims Administrator

    £16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

    Recruitment Genius: Senior SEO Executive

    £24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

    Day In a Page

    Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

    Fishing is on Nigel Farage's mind

    Ukip leader casts a line to the disaffected
    Who is bombing whom in the Middle East? It's amazing they don't all hit each other

    Who is bombing whom in the Middle East?

    Robert Fisk untangles the countries and factions
    China's influence on fashion: At the top of the game both creatively and commercially

    China's influence on fashion

    At the top of the game both creatively and commercially
    Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

    The man known as GOD has a reputation for getting the job done

    Lord O'Donnell's three principles of rule
    Rainbow shades: It's all bright on the night

    Rainbow shades

    It's all bright on the night
    'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

    Bread from heaven

    Dutch survivors thank RAF for World War II drop that saved millions
    Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

    How 'the Axe' helped Labour

    UK will be 'run for the wealthy and powerful' if Tories retain power
    Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

    The price to be paid for challenging the rule of extremists

    A revolution now 'consuming its own children'
    Welcome to the world of Megagames

    Welcome to the world of Megagames

    300 players take part in Watch the Skies! board game in London
    'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

    Charlotte Gainsbourg on 'Nymphomaniac'

    Starring in one of the most explicit films ever
    Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

    Robert Fisk in Abu Dhabi

    The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
    Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

    Vince Cable exclusive interview

    Charging fees for employment tribunals was 'a very bad move'
    Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

    Iwan Rheon is returning to his Welsh roots

    Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
    Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

    It's time for my close-up

    Meet the man who films great whites for a living
    Increasing numbers of homeless people in America keep their mobile phones on the streets

    Homeless people keep mobile phones

    A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before