Impact of Increase in VAT to 20% on Goods and Services Organizations in the UK

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Table of Contents

Introduction
Impact on goods and services organizations
Conclusion
Reference list

Introduction

Starting January 2011, the people in the UK have had to pay more for their everyday purchases of different goods and services. This follows an increment in their VAT to 20% from the previous 17.5%. The increment will have effects on every player in different industries but the heaviest burden will lie on the end consumer. “While businesses will have to pay more VAT on what they buy, they will be able to reclaim this against the amount of VAT the charge on sales” (HM Revenue & Customs, 2011).

Impact on goods and services organizations

Manufacturers and other traders will be forced to increase their prices by 2.5% to accommodate the extra cost. Price increment will affect their sales especially in this season, considered a busy one for traders. January and February usually attract many shoppers due to the post-holiday offers and traders will have a hard time deciding on whether to pass this cost to them or not. Many shoppers will reduce the number of goods and services they buy to fit their budgets. Salary rates have remained the same for a long time in the region, meaning most people will have to cut their consumption levels to accommodate the price changes.

Another effect of the increase of VAT is increased inflation rates (Wetherley and Otter, 2011). A high inflation rate results in increased interest rates, a factor that may pose a challenge to organizations seeking capital funds. Inflation affects commodity prices, which could result in fewer purchases when prices go up. Increased inflation rates will also put more pressure on employers to increase their employees’ salaries, in addition to their expenditure column of the balance sheet. A more long-term effect will be a change in the rates at which organizations will have to pay their benefits, meaning increased expenses for them.

For businesses that rely on export trade, an increase in VAT will pose a challenge, especially in today’s competitive global markets. A slight change in prices puts them in a disadvantaged position against their competitors from different regions with better prices. This translates into fewer volumes, especially for middlemen who have to buy from manufacturers then export.

Though the increased VAT rate has many negative effects on goods and services organizations, it has a long-term advantage for them. Increased VAT means that the government has more money at its disposal to fund more developments. The country will have better government-funded services such as medical care, reducing the amount of money spent by organizations on their employees’ medical care. Improved infrastructure will mean better and more affordable supply management and accessibility of goods. A government with better services and infrastructure developments offers a better environment for business and a reduced cost of doing business.

Conclusion

According to King and Rebecca (2011), “The increase from17.5% to 20% in the UK will cost each household around ₤520 a year”. Considering the salary rates will remain the same, this could mean reduced purchases for many goods and services. Long-term effects will include increased inflation rates, which could further mean price increments and reduced sales among many other negative effects on businesses. However, all is not lost for goods and services organizations. Improved government services and developments create a better business environment for them and a reduced cost of doing business.

Reference list

HM Revenue & Customs, 2011.Increase in the standard rate of VAT to 20 percent.

King, M. and Rebecca, S., 2011. What does the VAT rise mean?

Wetherley, P. and Otter, D., 2011. The business environment: Themes and issues 2^nd ed. Oxford: Oxford University Press.

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Impact of Increase in VAT to 20% on Goods and Services Organizations in the UK

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