Impact of VAT increase on retail

With the increase of VAT from 17.5% to 20% being introduced on 4th January 2011, we ask what its impact will be on consumer spending now and in 2011. Although many retailers took the hit and absorbed the rise in tax at the beginning of 2010 when the temporary reduction to 15% returned to 17.5%, this time it is widely reported that many retailers are planning to increase prices above and beyond 2.5%.

Whilst some believe that the impact will be negligible when purchasing low cost goods, there is a general consensus that big-ticket items will be hit particularly hard. It is also expected that there will be an imminent spike in spending as shoppers bring forward planned purchases in order to beat the tax rise. It is also likely that such a spike will be prolonged over the January sales period as retailers temporarily absorb the VAT increase within sale prices before moving to higher prices in late January. Today’s reporting of comments by Chancellor George Osborne that the VAT rise will be permanent could perversely have the effect of preventing a slump in sales, as consumers decide not to delay big-ticket purchases in anticipation of a VAT reduction.

In reality, it’s likely that there will be some effect on consumer spending habits due to the fact that incomes will remain the same yet prices will increase, resulting in a reduction in expenditure. It is anticipated that customers will engage in smarter shopping, using promotions and special offers, trialling more own-labels and visiting lower priced stores. Retailers on the other hand will have to find an alternative way of standing out from the competition, for example offering a better product, shopping environment and customer service.

January will no doubt be an interesting month as we monitor consumer spending and buying habits to evaluate what long-term effects may occur.

Lucinda Hannington, Senior Account Executive
Emily Burns, Account Executive

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