David Prosser: Enjoy the lower VAT while it lasts

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The Independent Online

Outlook When Alistair Darling announced a temporary reduction in VAT last November, many retailers were deeply sceptical about its benefits (not to mention cheesed off about the costs of changing systems at short notice). And with only four months to go before VAT goes back up to 17.5 per cent, there is plenty of that scepticism still about – PricewaterhouseCoopers said yesterday that the cut had not had any real impact on consumer spending.

Why, then, is the retail industry getting increasingly twitchy about the end of cut-price VAT on New Year's Eve? One reason is that the concession has had some positive effects, particularly on big-ticket items. Indeed, one peculiarity of this recession has been the resilience that retail sales have shown.

But there is another explanation for retailers' nervousness: the end of the concession comes at a difficult moment: just after the Christmas trading period and just before the key new year sales.

Many retailers are in a quandary. Should they bet everything on Christmas, bring sales forward and use the VAT expiry date for a "buy it while it's cheap" campaign? Or should they stick with plans for traditional new year sales and cross their fingers that the VAT hike won't undermine their discounts?

One thing is certain. Mr Darling will reject calls to extend the VAT cut to the end of January, a concession some retailers have been pushing for, citing the administrative headaches of adjusting their systems at a particularly busy time of the year. The chancellor cannot afford the £1bn-a-month cost of the VAT cut for any longer than he has already promised.

Moreover, January's VAT increase may not be the last. Whoever wins the election, a rise in VAT – probably to 20 per cent – is a distinct possibility as the Treasury seeks to rein in the public finances.

The Conservatives have already refused to rule out such a rise, with strategists pointing out that Margaret Thatcher raised VAT sharply early in her first term of office, presenting the move as an attempt to get on top of national debt. Her successor, John Major, backed the idea earlier this year, though the Tories insist George Osborne has no firm plans for a hike.

As for Mr Darling, VAT looks an equally tempting target. Indeed, draft Treasury plans, published by mistake last December, showed the Chancellor had considered raising the VAT rate to 18.5 per cent as soon as the cut-price period expired, though this idea was rejected.

It will be interesting to see what retailers have to say on the matter. Presumably, having found a small cut in VAT hasn't helped sales, they'll accept a small rise as unlikely to hinder business? Don't bet on it.