January VAT Rise
On 4 January 2011 VAT in the UK rose to 20% as part of the Coalition Government’s budget deficit reduction programme.
Tourism South East has long supported the tourism sector’s argument that VAT for tourism services should be lowered to 5% to improve the competitiveness of the country as a destination. Other European countries such as France have a much lower VAT rate on tourism services already and independent research has suggested that such a move could result in gains of up to £760 million savings in social security payments, increased income and corporation tax. The same study also predicted that an additional £440 million would be injected in to the industry supply chain.
The rise in VAT will undoubtedly have an effect on the sector and on your business. It is clear that there will be a combination of price rises and a reduction in profit margins.
Otherwise there area number of possible ways of mitigating the worst effects of the VAT rise. Below are five potential responses.
Responses to the VAT rise
1 Can I squeeze my suppliers and avoid passing on the VAT rise on to my customers?
This is unlikely as your suppliers will also be adapting to the VAT rise and rising levels of inflation – particularly if any of their products are imported from overseas.
However you should regularly review the prices that you pay for all of your supplies. More and more of your customers will be using price comparison websites when making decisions about their holidays and other spending choices. You should be using similar price comparison tools to make judgements about your spending.
Another avenue that you could explore is to join forces with other local businesses to boost your buying power. The reason that Tesco and Asda can charge less for groceries than the local corner shop is that simple economies of scale. The more units of a product you buy the cheaper it will be per unit. By forming a local buying group you might be able to extract better deals from suppliers.
2 Do I have other ways to protect my margins, if I take some of the VAT hit myself?
This could include taking some uncomfortable decisions like making greater efficiencies in other parts of your business i.e. staff costs. For micro businesses that do not employ staff there may be other options. You could review the services and products that you supply to guests and ask whether all of them are necessary. It is vital not to lower your standards and quality of service so this is not easy to achieve but it is worth considering.
3 Have I put my prices up already?
If you haven’t reviewed your prices in the last two years now should be the time to do so anyway. If you have recently raised your prices you should consider whether or not this will be enough to cover some of the rise in VAT.
4 Can I change the relationship between product and price point to finesse the rise?
If you are raising your prices is there something else that you could offer your customers that might not cost you much more? For example could you provide an extra service such wi fi internet access, onward booking services, etc? Essentially, can you improve your product to justify the price rise to the customer without raising your costs?
5 Can I provide enough promotional activity that the price rise goes unnoticed amid say, ‘3 for 2’ offers?
Offers such as ‘three for two’, ‘buy one get one free’, early bird discounting and ‘January sales’ are standard fare and proven methods of generating more business by enhancing your product and enabling customers to purchase your services. It is possible that promotions such as these can boost your bookings while masking the price rises that are being driven by the rise in VAT.
Making the necessary adjustments
In order to adapt to the new 20% VAT rate you will need to make adjustments to your invoicing process and know when to apply the new rate and on which services.
Follow this link to the HM Revenue and Customs website for all the information that you will need.
More Information
Download the study in to lower VAT rates here
For more information contact the development team.
