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 CashQuestions.com, 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 Lovemoney.com, 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 www.hmrc.gov.uk/vat/forms-rates/rates/goods-services.htm

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

PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Market Research Executive

    £23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

    Recruitment Genius: Technical Report Writer

    £25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

    Recruitment Genius: Web Developer - PHP

    £16500 - £16640 per annum: Recruitment Genius: This fast growing Finance compa...

    Ashdown Group: Client Services Manager - Relationship Management - London

    £30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

    Day In a Page

    Greece elections: In times like these, the EU has far more dangerous adversaries than Syriza

    Greece elections

    In times like these, the EU has far more dangerous adversaries than Syriza, says Patrick Cockburn
    Holocaust Memorial Day: Nazi victims remembered as spectre of prejudice reappears

    Holocaust Memorial Day

    Nazi victims remembered as spectre of prejudice reappears over Europe
    Fortitude and the Arctic attraction: Our fascination with the last great wilderness

    Magnetic north

    The Arctic has always exerted a pull, from Greek myth to new thriller Fortitude. Gerard Gilbert considers what's behind our fascination with the last great wilderness
    Homeless Veterans appeal: Homeless in Wales can find inspiration from Daniel’s story

    Homeless Veterans appeal

    Homeless in Wales can find inspiration from Daniel’s story
    Front National family feud? Marine Le Pen and her relatives clash over French far-right party's response to Paris terror attacks

    Front National family feud?

    Marine Le Pen and her relatives clash over French far-right party's response to Paris terror attacks
    Pot of gold: tasting the world’s most expensive tea

    Pot of gold

    Tasting the world’s most expensive tea
    10 best wildlife-watching experiences: From hen harriers to porpoises

    From hen harriers to porpoises: 10 best wildlife-watching experiences

    While many of Britain's birds have flown south for the winter, it's still a great time to get outside for a spot of twitching
    Nick Easter: 'I don’t want just to hold tackle bags, I want to be out there'

    'I don’t want just to hold tackle bags, I want to be out there'

    Nick Easter targeting World Cup place after England recall
    DSK, Dodo the Pimp, and the Carlton Hotel

    The inside track on France's trial of the year

    Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
    As provocative now as they ever were

    Sarah Kane season

    Why her plays are as provocative now as when they were written
    Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

    Murder of Japanese hostage has grim echoes of another killing

    Japanese mood was against what was seen as irresponsible trips to a vicious war zone
    Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

    Celebrities call on David Cameron to take more Syrian refugees

    One young mother tells of torture by Assad regime
    The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

    The enemy within

    People who hear voices in their heads are being encouraged to talk back
    'In Auschwitz you got used to anything'

    'In Auschwitz you got used to anything'

    Survivors of the Nazi concentration camp remember its horror, 70 years on
    Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

    Autumn/winter menswear 2015

    The uniforms that make up modern life come to the fore