Gadget Reseller News: UK VAT To Rise To 20%
If you’re a gadget reseller in the UK then some big and not all that positive news is coming your way. On the 4th of January 2011 the government is going to raise sales tax (VAT) to 20%. This will perhaps also affect people from other countries who buy from Britain or British suppliers, so read on to find out more on how this can affect you…
It’s unsurprising to see that VAT is being increased by the British government who are doing everything they can to dig the country out of its big hole. I think it’s safe to say that the UK isn’t going to ‘do an Iceland,’ but austerity is still key.
In this blog we’re going to look at what VAT is and how this increase could affect gadget resellers like you and your customers:
VAT? What’s That And How Does It Affect Me?
VAT stands for Value Added Tax and is, according to Encyclopedia.com:
A fee assessed against businesses at each step of the production and distribution process, usually whenever a product is resold or value is added to it. A VAT is levied on the difference between the purchase cost of an asset and the price at which it can be sold (i.e., the amount of value added to it). Producers and distributors typically pass the cost of the VAT on to the final consumer in the form of price increases. Tax is added to a product’s price each time it changes hands until delivery to the customer takes place, when the final tax is paid.
So every step of the way the rate of VAT will go to the government meaning that both resellers and their customers will have to pay VAT.
I’m A Reseller, What Are My Options?
This is the million-dollar-question isn’t it? You have 3 options:
- Pass on this VAT cost rise to your customers – this risks annoying customers, but is perhaps unavoidable, especially on items where profit is already low. At least customers will be used to price increases having seen them elsewhere.
- Try to limit the amount of VAT increase that you pass on to customers – accept giving customers a smaller cost increase and therefore accept a hit on your profit.
- Accept the entire VAT increase yourself – so don’t raise cost prices at all and accept the full hit of the increase to come from your profit. Customers will love this, but is it possible for your products?
In fact eBay have researched what other resellers have been saying, you can read the article here, and found that:
Nearly a quarter (24%) of online businesses will absorb the whole cost of the VAT hike to avoid stunting consumer demand, while a further 39% will avoid passing on the whole cost. Only a quarter (23%) intend to pass on the full cost of the rise to their customers.
eBay also enlisted the expert opinion of Martin Dane, Tax Principal at BDO, who gave this advice:
Martin Dane, Tax Principal at BDO said “The reality is that for a cash-strapped Government, the VAT hike is an easy win and for most consumers the additional VAT charge is actually very small, but from the point of view of SMEs it will lead to a significantly larger monthly or quarterly VAT bill and a potentially damaging loss of profit. It is essential that they act now and determine a strategy to protect their business”. He offers three tips to consider when repricing your goods:
- Watch your competitors closely – track your direct competitors activity and adapt your strategy according to the market..
- Take into careful consideration that the cost of the goods you source may also fluctuate due to the increase and this needs to be built into your pricing strategy.
- Be realistic – make a calculated decision on whether taking a profit hit would mean maintaining sales and therefore securing longevity, or whether passing the rise onto consumers would mean you sell less volume but maintain profits.
In light of the UK VAT increase, how do you think you will handle it? Answer our poll below: