Posted by Emma Gray in Online Retail | 0 comments
Emergency Budget 2010: Retailers braced for a VAT raise
There is much speculation regarding the potential impact of the new coalition governments emergency budget on the economy, which is due to be delivered by George Osborne today (22nd June). His speech is set to outline how the government plans to raise and spend money during the coming year. Economists predict that the new coalition government is posed to sign off a rise in VAT to 20% to bring it in line with the EU average and the question is more when rather than if due to the sheer scale of the fiscal correction required.
The Guardian indicates that the VAT increase is an attractive option for the chancellor. A rise in the VAT rate to 20% would create some £12bn, the same as a 3p rise in income tax. It would also provide cash on an annual basis, rather than just a one off sum. The increase however is likely to be delayed until April 2011 to give retailers the time to adjust their prices. If delayed until next year, the Telegraph predicts this will prompt consumers to make any major purchases before the higher rate is imposed. Economists also expect that any increase will only add to inflationary pressures and put pressure on the monetary policy committee to raise interest rates.
Predicted repercussions for the Retail Industry
Kelkoo, the shopping comparison website have conducted a study interviewing 56 of the UK’s major retailers to assess the potential impact of the forecasted rise in VAT to 20% on their businesses. ‘A VAT rate of 20% would raise £36bn from the retail industry including £4.5bn in additional tax, although it would cut retail sales growth by 0.64%’.
High Street Retailers
The report predicts that a VAT increase would reduce growth in overall retail sales to a little over 1%, instead of the projected 1.7% this year. Although many retailers expected to have to reassess their workforce in 2010 and 2011, an increase in VAT would significantly accelerate these plans. 77% of the retailers questioned inferred that a rise in VAT would have a negative effect on their employee numbers. 10% of retailers also thought that a VAT increase would result in them having to close 10% or more of their stores. Based on the survey data and the decline in store numbers in 2009, a rise in VAT to 20% could result in the closure of around 3% of stores nationwide, equivalent to 9,480 shops. The Guardian also indicates that any increase in the VAT could affect retailers such as Argos, who will have to print new catalogues with amended prices. High street retailers also face the costs incurred with printing new pricing labels for goods.
Online Retailers
In contrast the digital industry is not forecasted to suffer as much following the significant public sector overspend. This is because online retailer’s prices are on average 20% lower than the high street, thus making consumers more likely to seek out goods at lower prices. Ecommerce is forecasted to grow by around 12.4% in 2010 – 2011, but this may well rise to 15 – 17% if VAT induced price increases in traditional stores result in consumers going online. 33% of online retailers surveyed were more positive in terms of the commercial opportunities presented with an increase in VAT indicating this would lift their sales by between 1%-5%. Furthermore half of the online retailers surveyed anticipated that a rise would have either no effect on employee cutbacks, or perhaps even create 1%-5% uplift in staff numbers due to increased sales.
According to Zeta, more and more organisations and companies have attempted to embrace and understand the actual value of marketing their business and products online. The marketing budgets report put together by the Econsultancy also reveals that 66% of companies are planning to increase their digital marketing budgets during 2010. If you need any help or advice with your Online Marketing strategies don’t hesitate to get in contact with us. You can also check out our new website to get more of an idea of the products and services we have to offer.
A rise in VAT now looks almost certain to be announced in the Emergency budget. Don’t forget to keep checking our blog for any further updates on how the cuts in government spending might impact online retailers.
