UK RETAILERS are bracing themselves for a deterioration in trade in the coming year as the government’s VAT increase, coupled with swingeing spending cuts, put people off spending on the high street.
George Osborne, chancellor of the exchequer, insisted yesterday that the VAT rise was a “tough but necessary step’’ towards recovery.
He said he regarded the increase introduced from midnight yesterday as permanent, but said alternatives to tackle the deficit, such as rises in national insurance or income tax, would hit poorer families harder.
Northern Ireland’s business groups warned that the rise in VAT from 17.5 per cent to 20 per cent would slow the economy and threaten job security.
Glyn Roberts, chief executive of the Northern Ireland Independent Retail Trade Association says the increase is a “major mistake” that will cost small businesses and consumers dearly.
“The VAT hike is a regressive move which will do absolutely nothing to restore consumer confidence and get them spending again in our shops. It could well result in a further drop in consumer spend, which could mean more unemployment and business closures,” said Mr Roberts.
It would also lead to further expense for smaller retailers who had to change their pricing, which in come cases could cost as much as £2,000 (€2,341).
Francis Martin, president of the Northern Ireland Chamber of Commerce, said the tax increase was the last thing beleaguered businesses in the North needed. He said many companies had been hit with a double whammy of bad weather before Christmas and the subsequent water supply crisis. A VAT increase could push many of them to the wall.
Mr Martin said he expected some businesses and retailers might try to absorb the hike initially in a bid to encourage trade.
Newspapers, magazines, childrens’ clothing and food are exempt from VAT in the UK.
The British Labour party has claimed that it could cost the average family up to £400 a year.
The hike will see items with a previous price tag of £100 increase to £102.13. But those buying big-ticket purchases will feel the increase the most. Anyone who had hoped to buy, for example, a car that previously cost £10,000, will now be looking at paying £10,212.77.
Some of the UK’s biggest retailers including Marks Spencer and Tesco have said they will phase in the rise. However, the Federation of Small Businesses (FSB) in the North said small firms will be unable to absorb the increase and will have no choice but to pass on the full cost to customers.
The federation is calling on the UK government to help hard-hit firms by increasing the threshold at which they start paying VAT from the current rate of £70,000 to £90,000.
According to Ulster Bank economist Richard Ramsey, southern shoppers who travel North to do their weekly shop should be largely unaffected because food prices are not subject to the VAT increase. But, he says, the VAT increase is still a negative.
“Three factors normally influence cross-Border trade; underlying price competitiveness (excluding taxes and exchange rate movements), the exchange rate and changes in indirect taxation such as fuel duties and VAT.”
He expects that, outside of food, the fall in cross-border retail trade and wider business activity such as pubs, restaurants and hotels will be much more significant. – (Additional reporting Financial Times service 2011)
