The government’s planned VAT increase has come into force today, with a 20 per cent tax levy on goods purchased, apart from food, newspapers and magazines, and children’s clothing.
According to the Treasury, the increase from 17.5 per cent to 20 per cent will bring an extra £13bn in revenue, as the Coalition government battles to reduce the huge deficit facing the UK.
Chancellor George Osborne defended the rise, which comes on top of stinging increases in fuel prices this week, claiming it could boost employment and is a better alternative to raising income tax.
Figures from the Centre for Retail Research and Kelkoo predict that retail sales will fall by around £2.2bn in the first three months of the year, and the British Retail Consortium warned that the rise may have affected the January sales, compressing a month’s worth of activity into a few days over the New Year holiday.
Speaking to BBC Radio 4’s Today programme, Osborne said: “When you’ve got a very large budget deficit and you’re in the middle of a European sovereign debt crisis, and you’ve decided that at least part of dealing with the deficit has to come from tax rises, then I think VAT presents itself as the choice.
“If you look at the population and how much they spend, then VAT is progressive,” he said.
Alex Tatham, sales and marketing director at Westcoast, was unconcerned about the increase.
“I don’t think the VAT increase will have an impact at all on individual purchases, and businesses tend to absorb the rise anyway,” he said. “It may well have helped to clear out some retail stocks though. The country needs the cash and the government really doesn’t have any choice.”
Jeanette Bresitz, head of marketing at Spicers, said strong working relationships were key to riding the VAT storm.
“Even though most businesses are able to claim back VAT, the rise is likely to impact the customer’s purchasing behaviour because of the psychological impact of higher prices,” she said. “Therefore, transparency behind any rise is fundamental to establishing trust between the dealer and the customer. Loyalty is key so resellers need to form strong relationships with their customers at the start of the year to ensure they benefit from these throughout 2011.”
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