Tim Denison from Synovate believes that the VAT increase which will come into effect next January could be the first of a range of changes.
He has said that the coalition might look to adopt further changes similar to the ones other European countries have implemented. The government is likely to consider VAT again in the next 2 budgets and it is possible the chancellor might extend VAT to other product categories or re-introduce a different rate for luxury goods as was the case in the 1970s.
Synovate and KPMG recently published a report in conjunction with the Retail Think Tank that claims the UK’s retail sector will not suffer unduly by the rise. According to the research, Christmas and New Year promotions and the long preparation time could actually see some businesses boosting sales.
The government decided to implement the VAT change in January when it hopes inflation will be low and the country well on its way to economic recovery. By increasing the VAT rate by 2.5% the OBR hopes to raise an additional £12.1bn in 2011, increasing to £13.4bn by 2014.
But retailers will have to pass on a large proportion of the increase to consumers and either absorb the balance themselves or share the cost with suppliers. Whilst the VAT increase alone is not expected to have a serious affect on retailers, an interest rate rise and inflationary pressures could lead to serious repercussions.
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