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UK Faces 'Stealth' Price Hikes Due To VAT Hike

by Jason Gorringe, Tax-News.com, London

14 December 2010


Following a sustained period of recessionary discounting, UK retailers plan to utilize the impending value-added tax (VAT) rise, set for January 4, to increase prices markedly to nearer their pre-crisis levels, KPMG has found.

Retailers and consumer goods manufacturers are most likely to adapt their pricing strategy, with nearly 60% intending to raise prices over and above the 2.5% VAT rate increase due on January 4.

Across all industries, 40% of UK businesses plan to do likewise, according to the forthcoming KPMG report, 'Paying The Price For Recession.'

Martin Scott, Partner at KPMG Performance & Technology, said: "The economic downturn placed pressure on UK businesses to blanket discount, and the intention to raise prices is an understandable reaction. But, the timing must be right. In today's price-sensitive market, any increases may well have a damaging effect on sales volumes. Firms need to understand the overall impact on profitability.”

The KPMG research shows that a majority of firms were forced to discount prices across the board during the recession. It now appears that many are looking to use the VAT increase to mask price increases, KPMG has said.

"Downturn discounting has re-set the price baseline for consumers, who are now unwilling to pay more for goods and services. Companies need to be wary of first mover disadvantage,” Scott added.

Large-scale price increases could risk damaging consumer confidence and economic recovery, by causing an unexpected inflation spike on the high street at a time of fragile market conditions, he said, adding that: "Any short-term boost to profitability may be offset if longer term demand in the economy is dampened by pushing up inflation. With economic forecasts predicting a slowdown in the New Year, this could threaten an already precarious recovery.”

Scott also warned that firms risk raising prices without a clear understanding of the effect this may have on demand for their products and services.

"Businesses need a robust pricing strategy, built on a thorough understanding of their customers, and need to be aware that their customer base may have changed during the recession. In the US, for example bargain stores are picking up a broader range of shoppers and have become the darlings of the recession.”

According to the research, almost two thirds of business leaders admit that recession discounts were implemented without fully understanding the impact on demand. Furthermore, 64% of firms face a significant challenge to obtain accurate data on the impact of price on sales performance, KPMG further found.

"In this fragile economic environment, it is more important than ever for businesses to have access to the data and analysis to understand the impact of price changes on overall profitability and performance. Our research demonstrates the difficulties firms have in accessing and analysing that data,” Scott noted.

"Given that the majority of companies recognise that it will be a challenge to increase prices from discount levels set during recession, it is critical that firms understand the impact of price rises on their markets, before making sudden changes to pricing structures to coincide with the VAT increase,” Scott concluded.

TAGS: individuals | tax | business | value added tax (VAT) | law | United Kingdom | tax rates | inflation

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