VAT rise to hit consumer spending habits

Tuesday, January 4, 2011 - 14:20 by Simon Crisp

As part of the UK government's plans to reduce the deficit, VAT has now risen to 20 per cent, up from 17.5 per cent and a significant rise from the 15 per cent that was imposed by Labour to stimulate the retail market in 2009.

Experts are warning that a significant drop-off in sales is expected, with price comparison site Kelkoo predicting that £2.2 billion will be lost in the first quarter of 2011 because of the imposed hike in VAT.

An announcement from the British Retail Consortium (BRC), states that even the mighty January sales, which traditionally pull millions onto the high street and recently onto the internet, could be hampered by the implications of the rise. In its view, the biggest sales figures will have been recorded in the days leading up to the increase.

Seventy per cent of retailers who offer safe shopping online said that they expected a pre-rise rush as consumers plan on dodging the increase. The consequence is likely to be that a significant slowdown will occur as people pull in their feet and stop spending as they did before.

Financial expert Adrian Houstoun, told BBC News, that although the first half of 2011 might look a little bleak for retailers, once the year has passed its midpoint, he expects consumers to go back to spending as they did before the rise.

A rise in inflation is expected as a result of the VAT increase, although as with most matters relating to money there are many conflicting opinions as to just what might happen in the coming months.

The good news is that many retailers who offer safe shopping online will be looking to take up the slack and encourage competitive pricing, in order to attract most consumers to part with their cash.