VAT to rise in January: Emergency Budget

VAT is to rise to 20% from January, Chancellor George Osborne announced in today’s emergency Budget.

The move means that from January 4, the rate will rise by 2.5% from its current level of 17.5%.

Making the announcement, he said: “The years of debt and spending make this unavoidable. This single tax measure will by the end of the Parliament generate over £13bn a year of extra revenues, £13bn we don’t have to find from extra spending cuts or income tax rises.”

He said, however, that zero-rated items such as children’s clothing, newspapers and food would remain exempt.

Speaker John Bercow intervened to silence MPs’ complaints as the measure was announced.

The news is likely to provoke mixed feelings among retailers. Tesco, the UK’s biggest retailer, had previously called on the Government not to raise the tax immediately, saying it would hit an already fragile economy. However, it did accept that a rise was inevitable, though it had urged the Chancellor to wait before introducing it.

The British Retail Consortium has previously said that a rise in VAT to 20% would cost 163,000 jobs over four years and reduce consumer spending by £3.6bn over the same period.

Today its director general Stephen Robertson said: “We didn’t want a VAT increase. It’ll hit jobs, consumer spending, the pace of recovery and add to inflation but we accept the Government has no easy options. It’s some consolation that the range of VATable products isn’t being extended.

“Changing computer systems and shelf prices on tens of thousands of products is a huge, costly exercise for retailers. Planning for catalogues is a particular nightmare. The start date, in the middle of the busy and crucial post-Christmas sales period, will be difficult but retailers would rather have more notice than less. Six months to prepare is better than the rise coming-in this summer.”

And Maureen Hinton, practice leader at retail analysts Verdict, said: “Consumers are already being far more considered with their purchasing as they face the prospect of job cuts, reduced pensions, a continuing difficult housing market and greater general austerity. The benefit of a higher tax threshold for those on low incomes will be offset by the increase in VAT.

“Therefore though because of its discretionary nature a VAT increase appears a very fair way of raising taxes, the knock on effect will be to reduce demand further and hit retailers’ profits, raising the prospect of further casualties in the sector, despite the aid being given to business, particularly small, new, businesses. This in turn will hit employment in the retail sector, impacting the young, women and the low paid the most.

“However with the rise being delayed until next January there is likely to be a spike in sales at the end of 2010 as consumers bring forward purchases, but in the long term retailers are going to have to work much harder indeed to get us to part with our money.”

The good news, she said, was that it had not been applied beyond existing categories.

Our view: Retailers will have mixed feelings on this rise to VAT. They’ll be concerned about the threat to retail jobs and consumer spending, but at the same time relieved that it isn’t happening yet. There’s room for consumer spending to rise ahead of the sales tax hike, which doesn’t come in until January 4 – giving them a strong Christmas and good start to the January sales. But ultimately will they need to swallow the rise in VAT by giving further discounts to lure next year’s shoppers to spend after January? Only time will tell.