VAT goes up to 20 per cent
Tuesday, 04 January 2011 12:00
The VAT increase from 17.5 per cent to 20 per cent takes effect from today, Tuesday 4th January 2011.
It is an important part of government strategy to lower the UK's level of debt but critics argue that it will penalise the poorest and hit retailers hard.
The British Retail Consortium (BRC) says that the rise could have an effect on the January sales, with customers focusing their buying on the immediate period around the New Year to avoid paying extra VAT.
Businesses could feel the squeeze from a decline in sales and the affect of the rise in tandem with higher national insurance and business rates, higher commodity prices and rising transport costs could see many firms struggle during 2011.
The effect on households will be muted by the fact that food and children's clothing are not subject to VAT.
A survey of members by the Federation of Small Businesses (FSB) revealed that 70 per cent of members believe the rise in VAT will have a detrimental impact on their business.
John Walker, National Chairman, Federation of Small Businesses, said:
"Small businesses have had a tough time in 2010, especially towards the end of the year, when what should have been a very busy time as people make purchases before the VAT increase, but the busy Christmas period was hampered by heavy snowfall and severe weather.
"These figures show that almost half of respondents are going to have to increase prices as a result and 45 per cent think it's going to decrease their turnover - neither of which will help small firms take on more staff.
However, some business leaders say that the impact on sales may not last long.
Bob Darke, commercial director at electrical retailer Comet, said: "There is no reason to believe that consumer spending can't continue at pretty similar levels that we saw in 2010."
The rise in VAT could also have an impact on the Bank of England as it sets base rate in 2011. The rise in VAT could lead to increased inflationary pressure.
Inflation is currently at 3.3 per cent, well above the Bank of England's target rate of two per cent and the increase in VAT may push inflation towards four per cent and put pressure on the bank to raise interest rates.
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