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November 25 2008
Chancellor to spend £12.5 billion taking 2.5% off VAT
The Chancellor of the Exchequer cut 2.5% from the VAT rate in Monday's Pre-Budget Report, in a bid to boost consumer spending. Is this the best way to spend £12.5 billion? And how will you handle the cut in the run up to Christmas?
Monday's Pre-Budget Report saw Chancellor of the Exchequer Alistair Darling announce a huge swathe of initiatives designed to get the British economy moving again. The most expensive, and most controversial, is a 2.5% percentage point drop in the current 17.5% VAT rate, due to come into effect on 1 December and last until the end of 2009.
Already there are complaints that the VAT rate cut will be too complicated for retailers to implement and concerns that it just isn't a big enough cut to make a difference to consumers' shopping habits.
Most of the implementation issues relate to the high street but not online. Issues of price points, however, affect both. Below, you will see how Coda, which supplies finance systems to 25% of the high street, sees the problems. What do you think? Will it be easy or are there complications ahead even online? And will it work?
Coda, supplier of finance systems to 25% of the UK high street, today warned of the confusion the cut in VAT will cause for retailers and consumers in the run-up to Christmas.
Following discussions with its retail customers about implementing the 2.5% cut in VAT, Coda found that many believe it will cause more problems than it solves at a time when they are already discounting heavily. Among the concerns cited were:
- Risk of IT problems by overriding the pre-Christmas systems lock-down
- The time and cost associated with changing price tags
- Communicating price changes and setting a round number price point
- Handling customer refunds
"It is clear from talking to our customers that many are unprepared for this change which comes into effect from Monday," said David Turner, Group Marketing Director at Coda. "They usually have months to prepare for this kind of thing and test the associated systems, but introducing it at this time of year will cause a huge amount of confusion. Retailers generally 'lock-down' their systems in the run up to Christmas, to avoid the risk of IT failures in their busiest trading period. Although the VAT changes are simple enough to make within the accounting system, there are other complications."
"Retailers like neat price points — £1.99 or £24.99, for instance. But take off 2.5% and you get odd numbers like £1.94 or £24.37. They will need to decide whether they round prices up or down — or even if they actually will pass on the savings to the consumer. And they will have to account for the changes at the point of sale while ensuring the consumer is clear about how much an item costs. Retailers we spoke to were unanimous when they said it would take them some time to reflect the changes on price tags of current stock."
Many retailers planning to reflect the cut on current items said that the best they could do would be to produce generic 'price converter' posters showing how the VAT drop affected different prices, while reflecting the actual change through the central computer systems at the till. Many felt that they wouldn’t be able to change price tags until early next year or until they were ready to introduce new stock to their stores.
"Retailers in very seasonal areas like shoes told us they may have to wait until the next season’s stock comes in, early next year, before changing prices at all," said Turner. "This change comes just as many UK retailers have implemented changes for Ireland, which changes its VAT from 20 to 20.5% next week. It's looking like a change too far and Darling has made it clear that the changes will only last until the end of next year."
VAT Rate Reduction