UK retailers to grapple with VAT rise

Johnbaulchblogheader (3) Last week saw the new British government unveil its inaugural budget,referred to as 'the austerity budget' by some sections of the media (or 'tax and axe' as the less subtle headline writers quickly dubbed it). Immediate reaction from the media and the public was surprisingly muted, perhaps because we had been lead to believe that the measures that were to be introduced would be far more onerous than they actually proved to be (a victory for the new government's 'spin machine' ). The widely anticipated increase in VAT (sales tax) to 20% was the inevitable headline grabber, but as this won't come into effect until January 1st 2011, at least retailers will have 6 months to grapple with the ramifications of its implementation.

The previous government temporarily reduced VAT to 15% last year in a (vain) attempt to stimulate consumer spending. In practice, many retailers simply used the move to boost their own margins.Conversely, this time round retailers and suppliers will have to work out the best way of accomodating the 2.5% rise whilst maintaining key price points. If this was the only factor to be taken into consideration, it surely wouldn't be too difficult to find a workable solution. But even a cursory glance at what's happening in the Far East complicates the picture somewhat; the impending revaluation of the yuan, ongoing labour shortages, simmering tensions between factory owners and workers and major increases in freight costs all add up to a 'perfect storm' of converging factors that point only one way….an increase in the cost of Chinese manufactured goods.

At a time when UK consumers will have to face the 'greatest tax burden in a generation', retail price increases will be about as welcome as Sepp Blatter at an England football fans day – out (sorry, I couldn't resist one last World-Cup related metaphor!).

In the short-term, 2010 looks set to be a respectable year for the UK toy industry; first-half sales are up, and we have much to look forward to in the second half of the year (including -one would imagine – massive sales of Toy Story 3 merchandise… I saw a preview of the movie this weekend and was blown away! What a great film, and what an opportunity for the toy trade). But one suspects that retailers and suppliers already have one eye on 2011,and will be mindful of the challenges that lay ahead.

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