With VAT set to rise to 20% from January 4, we’ll soon be paying more for most consumer goods. So should you bring forward big purchases in a bid to beat the VAT hike?
An increase in the rate of Value Added Tax (VAT) was among the most controversial measures announced in the coalition government’s emergency budget – and it’s set to hit our pockets soon, as VAT will increase from 17.5% to 20% next month.
VAT is charged on a great variety of items, though some things – such as children’s clothing and non-luxury foods – are exempt from the tax. You can read more about what VAT is, and isn’t, charged on in our When you pay VAT news story.
According to major high street retailers including John Lewis, consumers have been rushing to buy expensive items such as iPads, sound docks and jewellery over the past few weeks – apparently because the price of these goods is set to climb immediately after Christmas. So should you be doing the same?
Understanding the VAT rise
While the rate at which VAT is charged on most consumer goods will increase by 2.5%, this doesn’t mean the price of goods will automatically go up by 2.5%.
Rather, to work out what an item will cost after the VAT rise, you should multiply its current price by 1.021. This means a CD that currently costs £9.99 will cost £10.20 after January 4.
As you would expect, the more expensive an item is in the first place, the greater the impact of the VAT hike on its final price. A new television costing £899 now, for example, will cost £918 in the New Year, while the price of ‘big ticket’ items like new cars and fitted kitchens will increase even further. (Motorists can read more about how to mitigate the effects of the VAT rise on their budgets by reading the 10 VAT-busting tips for drivers news story.)
If you were planning to buy a large item anyway, it may well make sense to bring forward your purchase so the VAT rate applied to it is 17.5%, not 20%. Which? shopping expert Sarah Dennis says: ‘Costly goods like high-end electrical goods, cars and even annual gym subscriptions will be cheaper this side of the VAT rise.
‘You could also get around the higher VAT rate by paying in full for goods and services that might not be received until later in 2011 – for example, the fitting of a new kitchen – although this may depend on exactly how long it takes the retailer to supply the items you’ve paid for.’
Will all retailers apply the VAT rise in January?
It’s also worth remembering that January is always sale season in the UK, and it is possible that some retailers will therefore be slow to pass on the VAT hike – or may offset it against larger-than-usual discounts to stimulate consumer spending.
‘At the moment we can’t be sure which shops will do this,’ says Sarah, ‘though some are bound to. A key way to get the best of sale prices and the lower VAT rate is to shop online for the things you want on Boxing Day. Many retailers start their sales immediately after Christmas – so by being quick off the blocks you could kill two birds with one stone.’
Overall, says Which? Money editor James Daley, it’s important not to let VAT-hike hysteria set in during the run-up to Christmas. ‘Don’t let the fear of price increases tempt you into spending more than you should before you can really afford it.
‘On the majority of items, the increase in cost due to the VAT rise will be relatively small – but you could easily run up a hefty credit card bill by letting price panic take hold.’
If you intend to use a credit card to buy big ticket items this season, consider using one with a 0%-on-purchases deal, or a cashback or rewards credit card.
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