How to avoid the VAT trap
How much more will it cost to have a pint in the pub or fill up your car with petrol now the VAT hike has come into effect?
At the moment, we’re constantly bombarded with news that the standard rate of VAT has jumped from 17.5% to 20%. Chancellor George Osborne describes the move as ‘tough but necessary’ while Labour leader Ed Miliband argues it will ‘slow growth and hit jobs’.
Political point scoring aside, what will the increase mean for everyday spending? First things first, a pint will now cost an average £3.06 according to trade body the British Beer and Pub Association.
And 2011 is off to a bad start for motorists with the AA predicting VAT and fuel duty hikes will add £104 to the annual fuel bill of a family with two cars.
Not surprisingly, the increase will be more painful on larger items – a £15,000 car jumps almost £320 to £15,319.15.
Buyer beware
Research from consultancy firm KPMG has found some retailers may use the VAT increase to disguise excessive profits. According to the findings, 60 per cent plan to hike prices beyond the VAT rise to compensate for the lacklustre economic climate.
Also, you will need to be vigilant to avoid a nasty surprise in the shops. Under current legislation, retailers have 28 days to adjust prices on items and can instead put up a notice informing customers a price adjustment will be made at the till.
You might, for instance, decide to buy a laptop marked as £450 but be asked to fork out almost £10 more at the till (£459.57).
Prices hikes at a glance
It is important to note businesses are not required to pass on the VAT hike to customers but can choose to absorb all (or part) of the additional cost. Although some may choose to delay price increases, experts widely predict most retailers will eventually pass on the full increase.
| Price before VAT hike | New price at 20% VAT | Increase |
| £1 | £1.02 | 2p |
| £10 | £10.21 | 21p |
| £50 | £51.06 | £1.06 |
| £100 | £102.13 | £2.13 |
| £500 | £510.64 | £10.64 |
| £1000 | £1,021.28 | £21.28 |
| £5000 | £5,106.38 | £106.38 |
| £10,000 | £10,212.77 | £212.77 |
| £20,000 | £20,425.53 | £425.53 |
| £50,000 | £51,063.83 | £1,063.83 |
Does VAT apply to everything?
Some items are exempt from VAT including ‘essential’ foods, books, newspapers, magazines and children’s clothes.
Furthermore, some goods such as children's car seats incur a reduced rate of 5%.
When it comes to your groceries, you could save money by knowing which items incur VAT and which are exempt. For instance, chocolate coated biscuits are subject to VAT but chocolate chip cookies are not.
Likewise, cold takeaways are exempt but you will be taxed on hot takeaways.
For more information see the HM Revenue & Customs website.
**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**
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