As part of the 2010 UK emergency budget given by Chancellor George Osborne, it was announced that VAT would rise from 17.5% to 20% on 4 January 2011. Other VAT rates aren't affected such as zero-rated items (such as children's clothes, foodstuffs, and books) and reduced rate items (such as safety items, sanitary products, and household fuel and power).

 

If you haven't already considered how your business will handle the VAT increase, now is the time to do so. While it may mean a difficult time to come over the next few years, those who come out on top may have bigger profits to come in the long-term.

 

 

It is expected that this move will create £13 billion extra revenue for the government every year. However, it will undoubtedly also hit consumer spending and retail jobs.

 

The Centre for Retail Research have predicted that 9,480 stores will close in 2011, and a further 5,000 in 2012. If that wasn't bad enough, 47,000 staff will lose their jobs, accounting for 1.6% of the available labour force.

 

This is gloomy news to be sure, but this isn't the case for all sectors. Discount stores are actually expected to increase, as more people try to pick up bargains.

 

 

Richard Dodd, from the British Retail Consortium, and Maureen Hinton, from retail analysts Verdict, have both suggested that the VAT increase might bring a rise in consumer spending on e-commerce websites in 2010. A short-term increase in e-commerce may occur due to consumers bringing forward their purchases to avoid the increase. 

 

In the midterm, customers may turn to the Internet for cheaper prices than they can find on the high street. However, in the long-term all retailers are probably going to have to work harder to make consumers part with their money.

 

 

The big question facing businesses is whether to absorb the increase, to pass it on to customers, or to take the middle way.

 

eBay surveyed 600 of their top sellers regarding the VAT, and 25% of them said they would absorb the entire increase. The Centre for Retail Research, mentioned above, suggest that the extra VAT will be passed on in full to the public as increased prices. Their survey found that 64% of retailers would pass on most of the increase to consumers within the first month.

 

The VAT increase will affect both consumer demand and the profitability of your business. If you don't want your income to be affected by the increase, you must consider how to streamline your business -- to lower your costs and increase your revenue.

 

You can read a detailed guide concerning the VAT increase on the HMRC website.