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Home Economic Fundamentals UK Economic Online retailers wary of impact VAT increase
Online retailers wary of impact VAT increase PDF Print E-mail
UK Economic
Written by Will Peters   
Thursday, 14 January 2010 16:17

With VAT returning to pre-recession level of 17.5% consumers will be 2.5% worse off than they were before Christmas. How will this impact online retailing?

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Almost all products consumers buy are subject to Value Added Tax (VAT).

The only exceptions are food, luxury items (which includes some non-essential foods), children’s clothes, health care products and living aids.

This means that all of those things that consumers, during the boom years of the 1990s and early 2000s, have become used to owning when times were good will now become more difficult to obtain. Added to this, the pre-budget report has filled consumers with gloomy apprehension for the coming financial year, starting in April 2010. Public sector workers will face pay caps; workers earning more than £20,000 per year will have to pay 0.5% more National Insurance; and the stamp duty holiday has come to an end too, with the threshold returning to £125,000.

All in all, a great number of consumers will be looking to save money everywhere, in any way that they can, with all of this extra expense to contend with. Both high and low earners will be hit by various changes outlined in the pre-budget report.

The highest earners, who bring home £150,000 or more per year, will pay 50% tax, whilst, those earning between £100,000 and £150,000 will have their tax free allowances phased out after April 2010. Additionally, inheritance tax, which was due to have its threshold raised to £350,000, will be frozen at £325,000.

At the other end of the scale, low earners are already complaining that the child benefit increase is minimal and there is not enough support for families with two working parents, with pay increases unlikely and prices rising.

With these factors taken into account, the 2.5% VAT increase will not be popular with consumers. The effects of the 2.5% VAT increase were already being felt as early as December.

Many consumers, spurred on by the threat of the tax hike, stocked up in December in order to beat the increase in prices, as well as buying all of their Christmas gifts, food, drink, cards, wrapping paper and decorations. In mid-December, bellwether store John Lewis reported its best ever week for sales, whilst Essex’s giant shopping mall, Bluewater, was overrun with shoppers desperate to buy before the tax hike came into effect.

The VAT increase will have a knock-on effect on any savings that consumers try to make. Though retailers are expected to keep trying to entice consumers with special offers, deals, interest-free credit and discounts, all of these must take into account the additional tax now due on all items. Dealing with the changes will be difficult for both consumers. Consumers are expected to look even harder for bargains, what with goods becoming more expensive and credit less easily available.

Internet shopping for bargains is expected to grow even more in 2010, as consumers find searching online for items and comparing deals from different retailers easier and more efficient on the web than in the shops. Additionally, retailers are expected to make extra efforts to keep sales afloat as the VAT increase hits in January. The January sales will be a crucial starting point, with retailers dropping their prices perhaps even more than usual for January in an attempt to shift unwanted stock.



Last Updated ( Thursday, 14 January 2010 18:10 )