VAT is now 20% – How will it pan out?

Following on from my last post, VAT is now 20%, but how is this actually going to impact on our spending patterns?

In my last post I discussed what would happen to the all-important price points.  Now the BBC has an article discussing the same subject:

Who, What, Why: What happens to £9.99 when VAT rises?

My recommendation was to not absorb the VAT change but to increase prices to the next available price point, say £10.49 or £10.99.  A number of people have questioned if this is a moral approach and have suggested that it is wrong to follow this plan of action.  After all, isn’t this just exploiting the situation in order to increase margins?  Like it or not, it is the line that The Telegraph seems to think that a lot of businesses will take:

VAT increase: shops could put up prices five to eight per cent

The article quotes a study by KPMG that found that 60 per cent of retail managers intended to increase prices above and beyond the 2.1 per cent.

Martin Scott, partner at KPMG, said: “If everyone was enjoying a healthy time of it, most retailers and manufacturers would just soak up the price increases and not pass them on to consumers. But they have been discounting for so long it is impossible to see how they can afford not to pass on the VAT increase, and some more. I’d be very surprised if we didn’t see the majority increase prices by far more than the VAT jump.”

One of the aspects of this debate that interests me is the predicted effect on the average family – or the not-so-average family.  The labour opposition are clearly taking the stance that the average family will suffer hardship as a result.  Ed Miliband has stated that it will cost families almost £400 per year.

Isn’t that £1.10 per day?

The Labour leader is suggesting that £1.10 per day is a big deal and, for certain demographics, I am sure it is.  But, as the owner or executive in an SME, do you want to have this demographic as your target market?

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About Adrian Fowles

Business advisor, finance mentor and cash coach - Turning your pipe dream into a revenue stream - http://acf-associates.com/
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