Carla Gray: Taxing times lie ahead as households face VAT rise

Published on Wednesday 29 December 2010 09:40

With VAT set to increase to 20 per cent in the New Year, Carla Gray finds out how it will affect your household budget

It's going to be bad, right? The hard-nosed Chancellor George Osborne is bumping up VAT from 17.5 per cent to 20 per cent in order to raise a staggering 13 billion a year for the national coffers.

That's 13bn coming out of your pockets and mine, so on top of the rising cost of living and little or nothing in pay rises, we are about to be squeezed by a tax hike which will hit us every time we shop.

It might feel like that, but the reality is a little different. On the whole, it is not quite as bad as many fear, although on at least one score it is actually slightly worse - but more of that later.

So what are you likely to notice after the change comes into effect on the first Tuesday of the New Year?

First the good news.

There is a lot of confusion about what goods and services will be affected - and many are not.

Most people know that food and drink generally does not incur VAT, although tax on alcohol, confectionary, crisps, soft drinks and other items such as toothpaste and cleaning products will all increase by 2.5 per cent.

More than a third of householders believe their energy bills will be subject to the VAT rise, when in fact it is pegged at a reduced rate of five per cent. Price comparison website uswitch, which carried out the survey, also found many people were scrambling to get holiday deals ahead of the New Year rise.

But, despite 69 per cent of holidaymakers believing flights are subject to VAT, they are not. Travel insurance is though. The panic buying, in this instance, however, might not be necessary.

The same survey found a great deal of caution amongst consumers, with 47 per cent saying it would make them think twice before buying anything that is not essential and 24 per cent ready to reconsider any big purchase.

There is still time - just - to make a saving on big-ticket items like electrical goods. The money might come in handy later in the year.

Collectively, British households will be around 6bn a year worse off after the VAT increase is introduced, according to marketing company Acxiom. It warns that those who can currently afford to eat out and spend more disposable income could be hard hit and pushed into the "overstretched" category.

There is conflicting evidence as to how quickly and how much hard-pressed traders are likely to pass on the price rise to consumers.

But the leading accountancy firm KPMG predicts that it will be used as a smokescreen to mask price rises of more than 2.5 per cent by almost two thirds of retailers.

There are other marketing gambits which shoppers should be alert to.

"Canny shopkeepers will do canny things, like advertising 'no VAT increases after Christmas', as they've already included the increases in the prices before Christmas," says Graham Bell, spokesman for the Edinburgh Chamber of Commerce.

"Pricing is up to the individual retailer, if customers don't like it they can vote with their feet."

Many smaller businesses may try to hold off putting prices up immediately after New Year for fear of losing customers, according to Janet Torley, regional vice-chair of the Federation of Small Businesses.

"I suspect small businesses will absorb the rise in VAT for the time being," she says. "Trading conditions are very tough and that's following hard on the heels of one of the worst Decembers in living memory."

Many small businesses may find the increased cost, though, could put them out of business, she warns.

For some households, of course, the rise could not come at a worse time. Trisha McAuley, the deputy director of Consumer Focus Scotland, says households are already facing above-inflation price rises on things such as gas, electricity, food, fuel and clothing.

"The VAT increase will add to budget pressures and make it harder for households to make ends meet," she says. "Now is the best time for consumers to shop around to check they are getting the best deal on all their essentials and consider switching things like phone or energy suppliers if they can make savings."

The other fear lurking in the background is that VAT will simply fuel inflation, making a rise in interest rates even more likely in the coming year. That's bad news of course for millions of households on tracker mortgages.

The other group that will be hard hit are long-suffering motorists who are facing a double whammy of VAT and fuel-duty increases in the New Year, which will push already rising petrol prices up by around 3.5p a litre.

For them, it may be hard to find positives from George Osborne's plan. Would it be grasping at straws to say it could make you healthier? With the VAT rise on so many snack foods and alcohol it might just be a little easier to keep any New Year's resolution to lose weight.