Proposed VAT hike would be ‘a killer blow’ to the retail economy

Mon, November 21, 2011


Michael Noonan's planned two per cent increase in the top rate of VAT, embarrassingly leaked from the German Bundestag, will place thousands of retailers on the brink of extinction, spark another flood of cross-border shopping and, inevitably, cause massive job losses, retailers and restaurant owners have warned.
And retailers say that the Government's 'suicidal' decision to drive the VAT rate up to 23 per cent will not generate the €670m in extra revenue the Government is hoping it will.
"Obviously the finance minister has never heard of price elasticity. When prices go up, people buy less. This VAT increase is a killing blow," said Dave Fitzsimons of Retail Excellence Ireland.
Retailers' organisations are generally in favour of indirect, rather than direct, taxation and had prepared for the planned increase in VAT, signalled in the Memorandum of Understanding signed with the EU/IMF/ECB troika. A one per cent rise in the top rate in 2013 and another one per cent in 2014 was expected.
Declan Ronayne, managing director of DSG (Currys and PC World) told the Sunday Independent: "Retailers understand that they cannot be immune to the pain. We knew there was an increase planned for 2013 and 2014 and we had time to prepare. All of a sudden we are hit with this two years too early. It's very, very scary and very, very shocking.
"The question I would ask the Government is: who is giving them this advice that this is a sensible, intelligent thing to do? Whoever is giving this advice is just not living in the real world. When they came out in Germany on Thursday night you could see the reaction on social media. People were saying: 'This is mad, I'm going north. I've had enough.'"
Mr Ronayne added: "Perception-wise it is a huge deal for consumers who are already feeling pressure.
"They are saying: 'Here is more tax coming on top of me. I'm not going to get a wage increase next year. I have to look after myself.' VAT is the tax that is in the most trouble and the solution is to lash it up? It is absolutely barmy. People will go north," he said.
Dave Fitzsimons said the planned increase in 2013 and 2014 would have allowed some growth to take place in the economy and retailers were broadly supportive of a planned increase they knew was coming down the line.
"But now it seems that the guarantees that were made are worthless and Mr Noonan has confirmed that it is two per cent for 2012. Make no mistake, this will cost jobs," he said.
There is a presumption, retailers admitted, that the two per cent hike to be officially announced on Budget Day, December 6, will not come into force until January, or later in 2012.
That would mean no increase before the vital pre-Christmas trading already under way.
However, there are real fears that the new VAT rate will lead to a flight to the north by southern consumers because the new rate will result in a three per cent differential between top VAT rates here and the six counties. The top rate of VAT is charged on a huge range of goods including beer, wine and spirits, petrol and diesel, non-oral medicines, detergents, pet food, toys, electronic goods like televisions as well as white goods, furniture, tools, car parts and accessories.
"The minister couldn't increase it on Budget night, could he? That would actually cancel Christmas for the retail sector," Mr Fitzsimons said.
Chief executive of the Kilkenny Group Marian O'Gorman expressed dismay. She said that some retailers might try to absorb the two per cent increase and not pass it on to customers "like we did with the last increase".
But she said that many smaller operators would simply not be able to do this.
"It couldn't come up at worse time. The 'Buy Irish' campaign is beginning to work and I must say we are quite happy that there is a level of recovery generally, but this is a hammer blow really.
"We sell a lot of Irish products and, ironically, the crafts industry here are desperately seeking a decrease in VAT in the Budget on crafts handmade in Ireland. They will be devastated. The small craftspeople have been making representations to the Government on this," she said.
A spokesman for Clerys department store said that the increase would make life very difficult for retailers who have already suffered a lot.
"The decline in VAT receipts to the Exchequer shows that when tax goes up it is a disincentive for people to buy," he added.
Ironically, a VAT increase in January may lead to a sales splurge pre-Christmas as people who usually wait for big-ticket items on offer in the January sales might be tempted to buy before prices go up.
Even before the shock leaking of the VAT increase plan, trading in retail generally remains subdued.
Some operators suggested that the first few weeks of November were positive, probably as a result of the welcome ECB interest-rate reduction news.
According to market research carried out by Retail Excellence Ireland, most operators are still experiencing like-for-like declines with some bearing double-digit negative growth.
Before the announcement, retailers were forecasting a decent Christmas trading period compared with 2010, which was hit by the big freeze.
"Our assessment is that January 2012 will trade down against January 2011 due to the impact of Budget 2012 and the fact that the adverse weather in December 2010 led to postponed Christmas spending running into January 2011. However, February 2011 was a very poor month because of the full impact of the introduction of the universal social charge," it said.
Now retailers are saying that a heavy-handed VAT increase would be fatal to any recovery in domestic consumer demand in 2012.
Chambers Ireland expressed anger: "At a time when consumer confidence is weak, an increase in VAT will only strengthen the black market and push consumers towards illicit traders," said chief executive Sean Murphy.
The Restaurants Association of Ireland, which will make a budget submission to Government this week, said simply: "A VAT increase of two per cent equals job losses."
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