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VAT to rise to 20%

Jonathan Sibun -

Retailers greeted the 20pc VAT increase from January with dismay and warned of the potential impact of a tax rise in the heart of the post-Christmas sales period.

However, the sector welcomed the decision to give the industry time to prepare for the increase and to continue to exempt certain products, such as food and children's clothing, from the spending tax.

The well-flagged rise – which came just months after the Liberal Democrats were campaigning against a "Tory VAT bombshell" – was branded as "unavoidable" by Chancellor George Osborne.

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Ben Brogan: Osborne delivered the unvarnished truth "This single tax measure will by the end of this Parliament generate over £13bn a year of extra revenues," Mr Osborne said to a loud chorus of boos from Labour backbenchers who argue that the tax rise from January 4 is regressive because it hits the poor as hard as the rich.

The Government said it expected some companies to absorb the VAT rise. "As a result, company profits as a share of GDP are lower, by 0.4 percentage points in 2014, than in the pre-Budget forecast," the Treasury said. It added that VAT receipts by 2014-15 are expected to be £11bn higher than pre-Budget forecasts, taking into account the VAT increase but also falling consumer spending levels.

Stephen Robertson, director general of the British Retail Consortium, said: "We didn't want a VAT increase.
It will hit jobs, consumer spending, the pace of recovery and add to inflation but we accept the Government has no easy options. It's some consolation that the range of VAT-able products isn't being extended. The start date, in the middle of the busy and crucial post-Christmas sales period, will be difficult but retailers would rather have more notice than less."

Alan Pearce, VAT partner at Blick Rothenberg Chartered Accountants, estimated the tax increase would cost the average family between £7 and £8 a week.

Richard Hyman, strategic retail adviser to Deloitte, said the tax rise was just the latest challenge for the sector. "Non-food retailers face increased costs as they import goods from the rapidly growing emerging economies.

"They may need to increase the price of goods by as much as 8pc but face a consumer that is not able or willing to accept increased prices."

22 June 2010
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