Chancellor George Osborne announced in June that the tax, which applies to most goods and services, will rise from 17.5 per cent to 20 per cent on January 4 next year, to help balance Britain’s books and generate more revenue for the cash-strapped state.
Most owner-managers and analysts say they will pass on the price rise directly to customers – with one notable exception being entrepreneur Lord Sugar who predicts prices will remain steady.
According to a current GrowthBusiness poll, which asks ‘What’s your approach to 20 per cent VAT’, 49 per cent of respondents say they will raise prices compared with 26 per cent who will absorb the extra cost.
An alarming 13 per cent say they will ‘give up and sell up’, signalling the dramatic effect increasing prices has on businesses still reeling from the financial crisis, and 9 per cent report that they will market cheaper products.
Further research by business insurer QBE last month, reveals that many small and medium sized enterprises (SMEs) are not ready for the VAT rise with a survey showing that of the 400 businesses questioned, only half are prepared for the change.
Co-founder and managing director of cosmetic shop retailer, Lush, Mark Constantine, says his company will be passing on the extra cost.
‘With the VAT increase, we will be putting the prices up, along with everyone else. The public has money to spend – we are not in the post war years – it’s just a question of their sentiment. If they are told it is all going to get tough, they will stop spending.’
James Bird, chief executive of IT provider Stone, the UK’s largest privately owned computer manufacturer, agrees, commenting: ‘The VAT increase gets us all – it’s another 2.5 per cent that nobody wants to pay but we’ll be passing it all on. If we were in a position where we could absorb some of the cost, then we would.’
Founder and chairman of retailer Mobile Fun, Anthony Cook, says he expects sales growth to continue in spite of the rise.
But he warns that the UK may lose its competitive edge because residents of other European nations – most of which have a VAT rate of around 20 per cent – might be less likely to buy online from British companies.
Cook adds: ‘We welcomed the 15 per cent rate of course, as it made our prices more attractive, but in the long run chopping and changing prices is more of an administrative burden to us.’
‘We’ll be conducting a price overhaul, with a combination of passing on costs and absorbing them, as otherwise some of our prices will look odd and we need to accommodate the price hikes that we will experience from our suppliers.’
Cook’s analysis contrasts with the opinion of Lord Sugar, who writes on his Twitter page that ‘prices will be same’ next year, while he comments that rushing to buy products before the VAT increase is a ‘mug’s game’.
Lord Sugar adds: ‘Retailers will either absorb VAT hike from their margin or more [probably] will screw suppliers so as to maintain same retail price.’