Delivering the coalition government’s emergency budget on
Tuesday, Chancellor George Osborne announced that VAT will rise
from 17.5 percent to 20 percent, effective 4th January 2011.
There was little surprise in the retail sector as many were
resigned to expect an increase.
Industry pundits were quick to comment on the rise. Maureen
Hinton, practice leader at retail research firm Verdict, said in
a statement released moments after the Chancellor’s announcement
that the increase seems “a very fair way of raising
taxes”, but that it will inevitably have a negative impact
on retailers who will have to fight harder to convince consumers
to part with their cash. Her view was echoed by the British
Retail Consortium, which predicts that a VAT rise will “hit
jobs, consumer spending, and economic growth”.
Taking a more positive view, Phil Orford, chief executive of the
Forum of Private Business, commented that whilst the VAT rise
will have an impact on many smaller businesses, “the money
to pay off the deficit has to come from somewhere and I expect
most would rather stomach a VAT increase than a rise in other
taxes, or even greater cuts in public spending.”
Kristine Kirby, the former home shopping director of Fat Face,
told Catalogue e-business that she also expected the
government to cut deeper. “A rise in VAT-anything that can
scare shoppers away, or cause businesses to cut staff-isn’t good.
However, cuts take longer to have an impact, while a VAT rise
hits to the bottom line as soon as it is put into play, so I can
see the reasoning.”
An eye on margins
The previous government had temporarily cut VAT to 15 percent
from December 2008 until 1st January 2010. For many retailers,
the new rate meant a systems change at the busiest trading
period. This time there has been ample warning, giving retailers
a chance to update systems and potentially negotiate new prices
with suppliers. Nigel Carr, managing director of shoe etailer
Shoes.co.uk, says that at a trade show in Milan in March, he’d
heard from some suppliers that a number of the larger retailers
had already begun costing the extra 2.5 percent into their autumn
2010 budgets.
Confirmation of a rise, therefore, did not come as a shock.
“Most suppliers will have already planned their spring 2011
ranges but they will have been mindful of a rise in VAT, and
therefore would have already calculated some leeway in the spring
pricing structure.”
This breathing space should help the margins of those retailers
who have set price points, as it gives them sufficient time to
work with their suppliers and negotiate new contracts without
passing on the increase to consumers. But Alex Pratt, founder of
reading lights catalogue Serious Readers, says that initially he
will have to absorb the cost to hold his prices, “but we
also took the gain when it was cut to 15 percent so we’re not
unhappy unless it lasts beyond a year, which is possible given
the European rates”. In the long-term, Pratt says that he
will “seek to recover losses” through increasing
shipping charges and negotiating with suppliers.
Pratt seems to be in a minority, though; in a recent poll of 675
UK retail decision-makers, marketing agency More2 found that a
mere 10 percent said they would absorb the cost, whilst 68
percent of respondents planned to up their prices. Overall, the
consensus is that it could have been much worse, “whilst
the new 20 percent rate will undoubtedly cause us some
headaches,” says Carr, “I, along with many others,
will wonder what else they could have possibly done to get
anywhere near to restoring the balance in public
finances.”
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Time to plan
The rise in VAT will put added pressure on retailers and make it
even more important that they “operate as efficiently as
possible and closely control costs,” says Geoff Cann,
finance director at cataloguer Dolls House Emporium. That’s why a
six-month reprieve comes as welcome news to the sector. To make
the most of it, Jacquie Joyce, head of retail and partner at law
firm Thomas Eggar, recommends that retailers audit their
businesses and renegotiate with their suppliers and landlords if
applicable. They should also look to implement “cost-saving
restructuring strategies so that [they] are leaner and fitter to
combat the rocky road ahead”.
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