20% VAT Rate Announced

British Retail Consortium Warning

Back in May the British Retail Consortium (BRC) warned that a hike in the VAT rate to 20% would cost ‘163,000 jobs over four years and reduce consumer spending by £3.6 Billion’. In a report carried out for the BRC by the Centre for Economics and Business Research (CEBR) the organisation concluded that there is no ‘silver bullet’ that will raise large amounts of revenue without causing significant damage to the UK Economy. The research found that a 20% VAT rate would:

• Reduce the deficit by £11.3 Billion in year one but would result in 30,000 fewer jobs by the end of that year
• Reduce consumer spending by:
  • £1.6 Billion in year two, AND
  • £3.6 Billion over four years
• Result in 163,000 less jobs after four years

At the time the Director General of the British Retail Consortium, Stephen Robertson, said that “For the first time we have clear, independent evidence showing VAT and NI increases will have a deep and long-lasting impact on jobs and growth. The budget deficit is serious. It has to be tackled but proposals must be judged against the implications for jobs and growth revealed by this new information. The main tool has to be cutting non-vital public spending. Removing some of the previously-planned National Insurance increase and signals that the Chancellor will look for an 80:20 split between public spending cuts and tax rises are a welcome start. Business growth will get the country out of the hole it\’s in, led by retail. The Government must now deliver a route to stability that supports companies and customers by avoiding damaging tax rises.\”

KPMG Reaction

Commenting on the announcement the UK Head of Restructuring at KPMG, Richard Fleming, said that \”The full severity of the financial crash cushioned by government schemes such as \’Time to pay\’; low interest rates and low exchange rates have bought retailers precious time as they seek to remodel their operations to suit the new low-demand climate. Businesses which have been unable to resolve their problems in this period of grace now face a stark future.  Retailers and property businesses, such as in secondary shopping centres, have struggled to cope with the drop in demand.  With VAT now confirmed at 20% we could see consumer spend drop by billions.  Small comfort perhaps but retailers will be breathing a sigh of relief that they have until January to implement the change.  Companies need time to build in VAT increases and indeed bringing in the change brings a heavy cost pressure, most acutely felt by SMEs. Those retailers teetering on the edge may find the VAT rise pushes them over the edge. While we have seen a lull in insolvency numbers in recent months, we expect this trend to reverse, particularly in industries such as retail and leisure where improving consumer demand is vital.”

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