Hull University Business School Column: Is the VAT rise really adding value to business?
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By Debra Johnson, Director of the Centre for Regional and International Business at Hull University Business School. FROM 4 January, consumers saw an increase in the cost of their average monthly bills as VAT rose from 17.5 per cent to 20 per cent as part of the government’s push to curb the UK’s deficit. Targeted to bring in around £13bn for the government’s coffers, what effect will this tax rise have on the country’s recovery? A recent Kelkoo study estimates that the VAT increase could end up costing each UK household an extra £425 per year, reducing spending power by 1.25% per annum. As a regressive tax, the rise will have a bigger impact on lower income families as they tend to pay out more of their earnings on VAT as an indirect tax on spending. For many consumers the impact will be immediate. Although most food is exempt from VAT, some basket staples including confectionery, drinks and snacks are not. Supermarkets may find themselves having to adjust their tactics to accommodate the change in buying trends as people purchase less to account for the rise in prices. So what does this mean for the retail industry in the region? The industry accounts for approximately 13 per cent of enterprise in Yorkshire and Humber, so a slowdown in retail sales could have an impact on jobs and growth in a region which has already been strongly hit with cuts to the public sector. It is not long ago that VAT was temporarily decreased to 15 per cent rise to tackle the effects of the global economic crisis. The short term cut was designed to kick-start sales by giving consumers more money to spend and businesses gave it a broad welcome when it was introduced in 2008. Many passed on the cuts to customers, but some used it as a chance to rebuild battered profit margins. However, with the new government comes a new tack. Businesses are now required to prepare themselves for the VAT rise which, although small in size, brings with it much media hype and fear from consumers for the pound in their purse. The weather during the festive season has not helped retailers prepare for this change. This period traditionally yields a sales bonanza for retailers, but many shoppers were kept indoors by the ice and snow and high street retailers are expecting a drop in year on year sales. For bars and restaurants the loss has been immediate and irreplaceable but for retail outlets there is still the opportunity to encourage post-Christmas spending by staving off the cost of the VAT rise for as long as possible. From cars to kitchens, retailers have been inundating the media with promises of absorbing the extra tax and of providing incentives, which on big ticket items, can make the difference between making a sale or not. Overall, it is important to keep this rise in perspective. It is equivalent to a 2.5 per cent price rise, which on a £10,000 car equates to £250 but on a weekly shop of £50 is only £1.25. In the short term, businesses may feel the pain if they are not able to absorb some of the cost themselves, but in the long term on its own, this rise is unlikely to have a massive impact on consumer habits. However, with the rise in the raw prices of basic foodstuffs, oil, gas, electricity and petrol, falling consumer confidence and fears of job losses, particularly in the public sector, the VAT rise may be the straw that breaks the over stretched purse strings of the UK consumer. Hull University Business School provides a range of short courses, including executive education in logistics and systems thinking. For more information on education programmes, contact +44(0)1482 347500 or businessschool@hull.ac.uk . More articles in
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