To VAT or not to VAT

Retailers seem to have had a fairly good Christmas trading period with John Lewis, Ocado and Shop Direct Group all reporting a strong Christmas performance. But no sooner was Christmas trading over with than retailers faced the tricky issue of the return of higher rate of VAT.

The 17.5% rate of VAT was reintroduced on New Years Eve, after a year of the lower rate of 15%.

The lower rate was introduced to ease the pressure on shoppers during the recession and encourage spending on big-ticket items.

The date of the return to a higher rate was the subject of much contention among retailers arguing that it was nonsensical to reintroduce the higher rate smack bang in the middle of the busiest trading period, posing a logistical nightmare for retailers to make the changes and avoid confusion for shoppers.

Retailers have been given a four-week grace period in which to make the change and how each retailer handles the reintroduction is up to them.

According to online comparison site PriceGrabber.co.uk, online retailers are “apathetic” about impact of the VAT increase. It carried out a survey, which found that 83% of online retailers believe that the New Year VAT increase will have no impact on their business.

PriceGrabber’s survey also showed that despite the return to higher VAT giving retailers an opportunity to encourage purchases before the rate increases, only 24% planned a marketing campaign and 15% planned a sales promotion to take advantage of it.

High street retailers and supermarkets seem to feel differently, with several making sweeping gestures to absorb the cost for consumers and delay putting the rates up.

Catalogue retailer Argos has said it will wait and put the rate back up when it releases the new catalogue at the end of January. Fellow stablemate, DIY retailer Homebase has said it will raise VAT on all its goods, although the price rise is unlikely to be immediately noticeable.

John Lewis has also said it will delay the increase and three of the UK’s largest supermarkets, Tesco Asda and Morrisons have already pledged not to reinstate the 17.5% rate immediately.

Tesco announced that it was not reinstating the higher rate of VAT on thousands of items including TVs, iPods. The retailer claims the move will save shoppers £12m, but it didn’t specify how long the deferral would last.

However, Tesco’s “VAT freeze” has been criticised and it has been claimed that the supermarket has increased the prices of over 1,500 products in December in preparation for the VAT rise to protect its profits.

Although it may be a gesture of good will for retailers to valiantly step in and absorb the higher rate, saving the consumers from giving another 2.5% VAT to the taxman, in practice it’s already created a minefield for consumers and chaos in stores.

To save from all the back biting and criticising of how rival retailers have handled the rate change, it would make more sense, at least in terms of consumer perception, if all retailers adhered to the deadline imposed and stopped using it as yet another tactic to get one over on rivals.

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