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VAT rise: the backlash

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We asked retailers and business owners for their views on the upcoming VAT hike. The reactions were pretty grim:

“As a new and small independent UK surfwear clothing brand, we’re in a highly competitive and price-sensitive marketplace and currently don’t have the brand equity or negotiation power to increase our prices in line with the VAT rise,” says Paul Spiers, owner of clothing brand Wave Native Surfwear. “All our clothing is ethically sourced and produced, so there’s already a small premium on our prices. In this instance, we’ll have to absorb the majority of the increase ourselves. This naturally leads to lower profitability which, in turn, impacts future growth. We understand the need for all of us to make a contribution to improving the economic welfare of the nation, but this seems to go against all perceived wisdom. The government is penalising entrepreneurs instead of encouraging them. The last thing we need right now is another kick where it hurts.”

Eric Partaker, co-founder of Mexican restaurant group Chilango, is having to grapple with the dual issues of rising food costs and increasing VAT. “We won’t compromise our food quality to cut costs, so we’ll have to pass on the VAT rise to our guests,” he says. “This VAT rise perpetuates the existing uneven playing field, as VAT doesn’t apply to takeaway sandwiches. We’re going to have to add value in other ways to maintain current guest loyalty and attract new diners.”

Mandy Brooks, managing director of Surrey-based marketing agency Chazbrooks, worries about the administrative burden of the VAT changes. “This means more disruption and inconvenience for businesses all over the UK,” she comments. “We have customers on regular payment plans paying a set amount each month. These will all have to be changed again. This will once again create unnecessary work for us and our customers.”

Anthony Cook, founder of £7m-turnover consumer electronics accessories etailer Mobile Fun, agrees: “The changes in VAT rates from 15 per cent, up to 17.5 per cent and now to 20 per cent are more of a headache for us than anything else. We welcomed the 15 per cent rate, of course, as it made our prices more attractive but, in the long run, chopping and changing prices is more of an administrative hassle to us. We’ll be conducting a price overhaul, with a combination of passing on costs and absorbing them, otherwise some of our prices will look odd and we need to accommodate the price hikes that we will experience from our suppliers.”

And it’s not just entrepreneurs who have slammed the move. Trade bodies and lobbying groups are concerned, too.

Steven Law, president of insolvency body R3, conducted a recent survey with insolvency practitioners. Half of the respondents believed that the VAT increase would be the biggest challenge for businesses in 2011. “Companies who rely on consumer spend will be the most adversely effected – typically the leisure, hotels and retail industries will bear the brunt as individuals begin to curtail their expenditure,” says Law. “These industries suffered heavily in the recession, and the businesses that did survive have drawn heavily on their reserves to do so.”

Phil Orford of the Forum of Private Business says firms will need to make sure that their accounting systems change accordingly to issue invoices and record sales and transactions at the new rate from January 4. “Any outstanding invoices for work which was genuinely carried out before the date can still be processed at 17.5 per cent so most businesses will probably need to create a new standard VAT code at 20 per cent, but retain a code for the old 17.5 per cent rate. Business owners also need to check that everything is at the correct rate when completing their next VAT return.”

We’ll be compiling entrepreneur comments and using them to lobby government on your behalf, so add your views below!

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