A short article looking at the 20% VAT rate increase in the UK and what this means for consumers, retailers and the Bank Of England.
Thecoalition Government's VAT increase could hit some of the poorest people in theUKand shadow chancellor Alan Johnson also believes this fact too. When unveilingthe VAT rise over the summer, George Osborne said it would raise more than£13bn a year by end of the parliament term. Although they will end up payingless VAT in total, lower income households spend a bigger share of theirincomes on taxed goods, meaning they are proportionately harder hit.
A localcharity shop in Leicestershire believes the increase in VAT means that wewill need to raise an additional £7,000 in funds this year to ensure that theycan continue to support the thousands of people who come for their help. Thecharity, Charity-Link, helps over 5,000 vulnerable children, young people,families and the elderly in the region each year.
Thegovernment says the rise is necessary to help bring down the UK's highbudget deficit. Chancellor Osborne said it was a move that was more"progressive" than a hike in income tax or National Insurance.
It has beenclaimed that many retailers are planning to use the tax rise to"mask" more extensive price increases however; the VAT rise may spura broader increase in the price of goods, according to a survey of 200 seniormanagers by accountancy group KPMG. It said 60% of retailers and consumerproduct manufacturers planned to increase their prices over and above the VATrise. The tax rise will also increase the advantage of big online vendors, whoavoid charging VAT altogether on small items by shipping them through the Channel Islands. This is possibly the most damaging taxavoidance scheme in the last decade, as it has a direct impact of virtuallyevery single UKretail business.
But manylarge retailers have said they will pass through the cost of the tax rise onlygradually, although many analysts believe this may just be because it is notfeasible for them to raise all of their prices overnight.
The BritishBeer and Pub Association (BBPA) predicted that up to 10,000 jobs could goin the brewing and pub sectors as VAT compounded a concurrent tax hike on beer.With a ten pence tax increase on a pint in the past year, duty and VAT on a pubpint is now 77 per cent higher than in January 1997.
The VATrise is also a worry for the Bank of England. At 3.3%, the annual rise in theconsumer prices index is already well above the Bank's target of 2%, and theincreased VAT rate is likely to push inflation towards 4% this year, analystssay.
Member ofthe Bank's policy-setting committee, have voted repeatedly for a rate rise inrecent months, to head off the inflation risk but other members think the highinflation is due to a number of one-off events, not least the VAT rise, andwill subside once government austerity measures kick in.
Economically,it’s certainly going to be a tough time for UK businesses and consumers overthe next coming months.
Theauthor works for an accountancy company specializing in vatregistrations.