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Online retailers set to absorb VAT rise

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Small and medium-sized online traders look set to join retailers across the UK in shielding consumers from today’s rise in VAT – in the short term at least.

eBay’s Online Business Index found that 24% of online businesses would absorb the whole cost of the VAT rise, which goes up today from 17.5% to 20%, while 39% would not pass the whole cost on to consumers. Just 23% are passing it on in full.

The survey, which takes the temperature of more than 600 VAT-registered online traders, comes at the end of a quarter that has seen a 20% rise in digital sales for eBay’s SME traders. eBay itself saw an 11% rise in the number of online businesses trading through its site in the final quarter of 2010, running to December 21.

Despite the recent sales boom, online traders are concerned by the rise in VAT. Half of online SMEs believe it will hit their income next year and 63% believe it will hit the wider economy and consumer demand.

Jody Ford, eBay UK’s director of SME businesses, said: “Our latest figures reveal that online businesses are continuing to thrive. However the VAT rise is set to hit at the busiest time of year for our businesses, with January on average 10% busier for online firms than a typical month.

“Every business owner, including the 160,000 who make their living on our site, faces a difficult dilemma over whether to pass on the imminent VAT rise to their customers.

“The fact that more than 60% of businesses intend to absorb all or part of the VAT hike reveals the real concerns they have about its impact on consumer confidence.”

The findings chime with the mood from the British Retail Consortium (BRC) which said this week that many retailers would be burying the rise in VAT among heavy post-Christmas discounts as they looked to make up for missed sales thanks to the icy weather in the run up to the festivities.

It added that retailers had seen only a ‘modest’ boost in high-end retail sales ahead of the tax rise.

But, warned Richard Lim, BRC economist: “Retailers can’t absorb the cost indefinitely. In time, the VAT increase will push inflation up and – along with National Insurance rises and public sector job losses – will harm sales as the year continues.” He added: “But we do accept that the VAT rise, with substantial public spending cuts, is necessary.”

Martin Dane, tax principal at accountants BDO, said: “The reality is that for a cash-strapped Government the VAT hike is an easy win and for most consumers the additional VAT charge is actually very small but from the point of SMEs it will lead to a significantly larger monthly or quarterly VAT bill and a potentially damaging loss of profit. It is essential they act now and determine a strategy to protect their business.”

Three tips for weathering the VAT rise

By Martin Dane, tax principal at BDO

• Watch your competitors closely – track your direct competitors’ activity and adapt your strategy according to the market.

• Take into careful consideration that the cost of the goods you source may also fluctuate due to the increase and this needs to be built into your pricing strategy.

• Be realistic – make a calculated decision on whether taking a profit hit would mean maintaining sales and therefore securing longevity or whether passing the rise onto consumers would mean you sell less volume but maintain profits.

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