Osborne confirms VAT rise to 20% but increase delayed until 2011

Sales tax is rising by 2.5 percentage points to 20% starting on 4 January, 2011, as part of the coalition government’s plans to reduce the UK budget deficit.

George Osborne
George Osborne

Chancellor George Osborne said in his emergency budget speech today that the rise in VAT would generate £13bn a year in extra revenues and that it would not be applied to currently VAT exempt items such as food, children’s clothing, books or newspapers.

There will be no immediate increase in duties on alcohol, tobacco or fuel at the moment and the planned cider tax has been axed but measures may be taken on alchol pricing to discourage binge and underage drinking later this year.

The rise in VAT had been widely predicted, although the fact it has been delayed until January will be welcomed by retailers who had anticipated that the rise would come in the autumn.

Stephen Robertson, director-general of the British Retail Consortium, says: “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.

“Retailers will work hard to implement the increase smoothly but there must be a light-touch to enforcement at the time of introduction.”

It may be that consumers wait even longer to feel the increases, with predictions that retailers will use the VAT increase as a point of difference.

Stuart Mitchell, CEO of retail marketing consultancy Live & Breathe, says, “Savvy retailers will use it as a marketing tool to gain some kind of advantage. Retailers will be mindful that they don’t want the VAT increase to stall sales so some will freeze it for a period of time.”

“If it means taking the hit and freezing VAT to avoid stalling sales, retailers will do that.”

But in the long run, retailers will have to find other ways other than discounting to draw customers in.

Tim Ogle, founder of the agency Retail Eyes, says, “Adopting aggressive pricing strategies to drive footfall is hard to sustain and doesn’t necessarily lead to brand loyalty; customers just choose the store that offers the best price or bargain at that time.

“Customers will be looking for businesses to deliver service and experiences that they feel give them the best value for money, giving them the reassurance to spend and increasing the chances of them returning to your store.”

Other changes announced today include a “private injection” into Royal Mail, the sale of air traffic control body NATS and the sale of the student loan book. Osborne also said that the future of government book maker Tote, which has been up for sale for some time, would be finally resolved.

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