After a year pegged back at 15%, VAT is due to return to 17.5% on January 1. What material impact will the increase have on retailers’ margins in 2010?
A year passes quickly and in just over a month’s time it will be more than 12 months since VAT rates were reduced from 17.5% to 15%.
By the time the 15% rate became effective, on January 1 this year, there had already been much discussion about what effect it would have on retailers, shopper mindsets and the operational side of running a business. In the event, most of the major retailers made much of the fact that they were passing on the cut and that shoppers would welcome the difference.
Whether they did or didn’t pass on the cut to consumers is perhaps beside the point. For those in employment, 2.5 percentage points is unlikely to be the difference between penury and plenty.
And yet in four weeks VAT rates are scheduled to return to where they were 12 months ago. The question therefore is whether the cut in rates has made any difference to retailers or shoppers and, equally, whether the reimposition of a 17.5% rate will make a material difference to the fortunes of either.
British Shops and Stores Association (BSSA) director of communications Mick Weedon says the most unfortunate thing about the whole affair has been the timing. “We did wonder if they [the Government] were going to delay the rise of VAT until after the election. We had hoped there would be a pre-budget statement in mid-November, but we now know it will be on December 10.” This, he says, would have made discussion about restoring rates to 17.5% a realistic possibility, but leaving things until mid-December means it is almost certain to go ahead on January 1.
From a retailer’s perspective, this means that if they reduce prices to reflect the cut, they will have to reticket and change barcodes at the time they are likely to be busiest because of Christmas and post-Christmas Sales.
However, for many, the VAT issue is something of a sideshow. Patrick Ritchie, owner of upscale Aberdeen menswear indie Signature 2, says: “Did we pass on the cut? Certainly not. It didn’t make a blind bit of difference for our level of the menswear market. If you’re charging £100 for a shirt, 2.5 percentage points
It’s a view that strikes a chord with others. Jan Shutt, owner of premium indie Sunday Best in Rawtenstall, Lancashire, says: “We’ve got so many styles that going through each of them in the computer and changing everything on the tickets didn’t seem worth it.” Shutt adds that during 2009 she has had only one enquiry about whether the reduction in rates had been passed on.
A futile exercise
The majority of indie retailers appear to have adopted the position of doing nothing about the VAT cut and, equally, intend to do nothing when rates are increased at the beginning of January.
So where does this leave the status quo? For those that opted to do nothing there has been, in effect, a temporary boost to margins – one that may, or may not, be reflected in 2009’s results. The reason they may not is outlined by Weedon: “A lot of [indie] retailers didn’t do much about the reduction and the boost got lost in the wash as price rises came through in the new year. The restoration of the 17.5% rate will make a difference, but it won’t be significant.”
International Fashion Federation chairman Glynn Alwyn-Jones is also unimpressed. “It’ll have the same effect as when it was brought down. The bigger retailers incurred significant management costs in bringing VAT down and I don’t think these were covered by any rise in sales. The smaller retailers didn’t see any increase [in sales] anyway.”
Alwyn-Jones dismisses the whole thing as a “completely futile exercise”, saying is was a “vote-getter” that has ended up costing the government money, as there has been no tangible increase in sales.
At the Drapers and WGSN Fashion Summit two weeks ago, George at Asda managing director Anthony Thompson pledged not to push up ticket prices when the January rate change is due. It is moot whether this is because of a desire to help shoppers or because the cost of reticketing is such that it will be cost-neutral.
There is, however, rather more to the VAT debate than whether or not to reduce, reimpose or do nothing at store level. By the end of June 2010, there will have been a general election and most commentators are convinced that following this, the 2.5 percentage point January VAT hike will prove to be just the beginning. Alwyn-Jones says: “If the Conservatives get in, it’s higher VAT, that’s for sure, because their core voters won’t put up with 50% higher rates [of direct taxation].”
An inevitable rise?
The dilemma facing any future administration will be how to recoup the revenues lost through VAT reduction over the past 12 months, and higher VAT does appear an effective way of doing this.
Shutt says: “Bit by bit, we have tried to be a little bit price sensitive. If people haven’t got quite as much to spend at the top end, on labels like Versace or Moschino, then they may go for something else. If VAT goes up a lot then we’ll have to take a hit on margin in order to maintain prices.”
Most retailers, big and small, get rather more exercised about exchange rates than they do about varying rates of VAT. Shutt makes the point that with most European labels operating from a euro cost base and supplying on the basis of recommended retail prices, the combination of higher VAT and poor sterling/euro exchange rates could be enough to force small retailers shut.
Alwyn-Jones agrees: “I think the most pressing problem is with the euro. We’re still at e1.10 to the pound and there really has been no forward movement.” He asks: “Why should retailers or manufacturers swallow the loss of margin? Germany’s galloping away and we’re still in recession.”
It seems the VAT rate cut and its subsequent reimposition may well be seen as little more than a blip that had no effect other than to further deplete the Treasury’s coffers. And, ultimately, this will have to be paid for. The only question is the manner in which this will be done, and it looks probable that 2010 may be characterised by higher VAT rates. Whether this is passed on or not remains to be seen, but something will have to give.
The retail view
‘If VAT goes up a lot then we’ll have to take a hit on margin to maintain prices’
Jan Shutt owner of indie Sunday Best in Rawtenstall, Lancashire
‘The VAT cut didn’t make a bit of difference for our level of the market’
Patrick Ritchie owner of indie Signature in Aberdeen
‘The most pressing problem is the euro. We’re still at €1.10 to the pound’
Glynn Alwyn-Jones chairman, International Fashion Federation