It’s the first week of 2011 and we’ve been inundated with ‘Beat the VAT’ signs in newsletters and shop windows, and heated PMQs all denouncing the coalition’s decision to increase value added tax.
On January 4 VAT went up from 17.5% to 20% – a rise that will hit retailers and consumers hard over the coming year. It will set the average household back an estimated £425, decrease spending power by 1.25%, and damage consumer confidence.
How does it affect what you buy?
VAT isn’t applied to all and sundry and the increase only actually concerns products that already have the standard VAT rate attached to them. So those with VAT exemptions and zero-rate or reduced-rate VAT sales will see no change. These items include children’s clothing and newspapers.
Food is a funny sector regarding VAT:
With both the retailer and the consumer at the heart of our business, mydeco conducted a survey to determine how spending habits would change just before and after the VAT rise.
As you can see, the cost of investments such as house extensions and cars will increase by several hundred pounds; smaller items like televisions won’t be any more unaffordable as before, but even small price increases will accumulate and be felt over the course of the year.
Harry Copinska, a sales manager from Wimbledon with three teenagers to support, says: ‘Unless you really needed a new sofa or TV it’s not likely you’re just going to go out and buy one before the hike for the sake of ten quid, especially when everyone’s trying to save a few [pennies] over Christmas.
‘It does make sense if you want something that will cost a few hundred [pounds] more, but if you have to save up for it, those extra few pay cheques to squirrel away could be an incentive to either buy a cheaper model, or make do with what you’ve got.’
‘I’m just going to shop as I usually do,’ adds Mr Copinska, 44. ‘I think online sales shopping will be popular this year as it’s so easy and you don’t have to struggle in the snow.
‘But I think people will be less frivolous this year, online or on the high street. If you see a bargain you’re really going to consider if you actually need it rather than waste the money, despite a 70% saving and no extra VAT. Even my kids have said they’d rather I save the money on DVDs they don’t really need for our summer holiday.’
Why has the coalition made a decision that has such a negative impact on consumer spending?
When the country has a record deficit of £178bn, and the fourth lowest rate of VAT in the whole of Europe (the average is just over 20%), it starts to earn some legitimacy.
Chancellor of the Exchequer George Osbourne has defended the hike as it will raise over £13bn by the next parliamentary election.
Furthermore, last year it was calculated that VAT receipts rose from £68.64bn in 2009 to £80.15bn, and the extra 2.5% will now generate a further £11.4bn for the Treasury.
However, of this the retailer sector will have to cough up £4.5bn, in addition to the £31.5bn it already raises on an annual basis.
With reduced spending in an already frugal retail market, where will savings be made to generate this extra money?
From the employee of course; it is predicted that 10,000 stores could close and nationwide job losses could reach 47,000 in the onslaught.
The VAT rise will almost certainly have a negative impact on the volume of retail sales, which will damage consumer confidence further and diminish economic growth forecasts for the next retail year.
Oli Franklin, 23, a freelance journalist from London, says: ‘The hike does indeed worry me, as London is expensive enough without an extra 2.5% on everything. I’m loaded with debt and frequently teetering on the precipice of total bankruptcy, so my spending will remain as close to zero as I can manage.’
But it goes without saying that the retail industry is vital to the nation’s economy, having in excess of three million employees and supplying 24.8% of the UK’s gross domestic product.
So where can retailers and consumers turn to?
Many stores, from high street to high-end, have launched huge discounts in their January sales to boost purchases in the face of surprisingly dismal Christmas spending and the predicted knock-on effect of the VAT increase.
mydeco.com CEO Nicole Vanderbilt says: ‘It looks like Britain has made a new year’s resolution to improve its homes this January; average spend has almost doubled during the first few days of the month compared to Q4. Demand for sofas, particularly corner sofas and sofa beds, has sky-rocketed by more than 1,000%.
‘Many retailers have offered bigger discounts than normal this year and shoppers are taking advantage of sales of up to 70%. So far, retailers offering the best discounts have increased sales the most spectacularly during December/January – as opposed to those promoting ‘beat the VAT increase’ campaigns.’
‘Avoid the big chains unless they have explicitly said that they will be absorbing the VAT,’ advises Kiwi Funk, online sellers of unique homeware and gifts. ‘Purchase from companies who are not VAT registered. These tend to be smaller businesses, especially those online, who have turnover of less than £67,000.’
Online gardening company Green Fingers is absorbing the VAT hike to reward customers for their loyalty, says general manager Moira Peterson.
‘We realise how tough things will be for our customers in the coming year, and we’re keen to do what we can to help,’ she added.
Even so, the extra 2.5% cannot be ignored for too long and will have to be applied by the majority of retailers after the January sales high has ended.
Image credit: Juliette Interiors
Despite the VAT ‘scare’, Juliette Thomas, director of Juliette Interiors, remains positive about sales in 2011. She says: ‘VAT has to be paid, but the VAT changes have no effect on our business at all. If anything, it has brought a few orders in a month early for our UK or EU business orders.
‘Our average order value is very large and we tend to sell high value items, which are hard to find, or bespoke items to meet our customer requirements so an extra 2.5% is neither here or there, bearing in mind the service and products we offer to our clients worldwide.’
However, as mydeco’s CEO points out, we, as retailers and consumers, won’t see the real impact of the VAT increase until well into February or beyond.
Ellie was mydeco.com's fabulous Editor for three years, and is now off exploring South America. Read more posts by Ellie.