Six Months to Prepare for the January VAT Rise

The Chancellor’s decision to raise VAT to 20% in January 2011 will hit small business sales, but does give firms time to prepare, business groups have said.

George Osborne announced in his Budget speech that the main rate of VAT would increase from 17.5% to 20% from 4 January 2011. However, the range of VAT-able products has not been extended and essential items such as food, children’s clothing and newspapers will remain free from VAT.

According to research by uSwitchforBusiness the independent energy brokerage service for businesses, one third of small firms are concerned that the VAT rise will deter consumers from spending.

“Sales will definitely suffer for small firms,”

said Federation of Small Businesses (FSB) chief press spokesman, Stephen Alambritis.

“Small businesses are very sensitive to VAT rises. The main worry is that the big retailers will extend their sales into January and say that they are not passing on the VAT. That is bound to drive customers away from independent retailers.”

The British Retail Consortium’s 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.

“Changing computer systems and shelf prices on tens of thousands of products is a huge, costly exercise for retailers. 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.”

The British Chamber of Commerce’s director general, David Frost, agreed that the January rise gave businesses plenty of time to adjust their prices.

“While the rise will inevitably affect businesses and consumption, we are pleased that the Government has put off the increase to 4 January 2011. A few days’ delay after New Year gives businesses time to adjust.”

According to the FSB, the recent VAT changes (from 17.5% to 15% and back) cost small firms £1,500 each in administration alone.

“Small businesses now have plenty of time to change all of their pricing information,” said Alambritis. “They can also look at their cashflow and see whether they can absorb the increase. That’s unlikely for most firms as margins are already very tight, but another option is to look at sourcing things more cheaply.”

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