Christmas chaos heading our way

There may be six months to go to Christmas, but already a festive row is brewing between the government and retailers over the rate of Value Added Tax (VAT).

In last December’s Autumn Statement, Alistair Darling sought to limit the damage to the economy from the global downturn by “giving away” £11.4bn by temporarily cutting the rate of VAT from 17.5% to 15% for a year.

This caused chaos to retailers and their suppliers because they had to recalculate every price overnight. It was even worse in the drinks sector because the chancellor imposed what he thought were countervailing increases in excise duties to ensure that retail prices for alcohol did not fall. Yet he overlooked the fact that excise duties are levied on volumes, while VAT is value tax – as its name implies. So the market was distorted – wines at the lower end of the price range went up while those in the upper echelons of the price spectrum fell.

Darling emphasised that the VAT cut would last only a year, but it has emerged that the Treasury is planning to increase the rate of VAT on 1 January. Even Darling realises that a 1 December rise would be as popular with voters as Christmas is with turkeys.

Retailers say this will require expensive overtime on New Year’s Eve to recalibrate tills and reprice displays. Worse, they plead, it will distort the New Year sales by advancing them into December as people seek to beat the increase. In light of this, the British Retail Consortium wants any increase in VAT postponed until the end of January. For an unpopular government, that would be delaying it until perilously close to election day, but retailers do not have much of an argument because, for the past couple of years, many of them have started their sales well before Christmas.

For drinks importers and distributors, a 1 January change might seem less traumatic than for retailers. Many will not reopen after Christmas until Monday 4 January, so the calculations could seemingly be made at leisure. But that is not the main problem.

What everyone needs is certainty, but no chancellor (whoever he may be) is going to reveal his hand before he is forced to the Dispatch Box in early December.
So there are two further salient questions requiring early answers. First, will the rate of VAT merely be reinstated at 17.5%? Some economists forecast that it could go to 18% or even 20% as the Treasury seeks to plug the huge gap in the nation’s finances. And what about those “balancing” excise duty increases? Will they be removed? Nobody in the trade thinks so.

So we face the prospect of an early December announcement of the new rate followed by retailers wanting to order before it takes effect (but for January delivery, thank you) and shippers wondering how to organise late December shipments of extra stocks from their overseas producers. Get ready for Christmas chaos.

Finance on Friday, 19.06.2009