We recently wrote about the process of bottom feeding as a natural part of the prelude to economic recovery (see post). It well be the case that the retail sector has been engaged in this activity itself over the question of VAT (a form of sales tax imposed in all EU nations, but at different national rates).
As part of the fiscal stimulus to the UK economy, the Government reduced VAT from 17.5% to 15% for the period 1st December 2008 to 31st December 2009. Ordinarily, we would expect this to lead to a reduction in UK consumer prices. However, it now transpires that a good portion of the UK retail sector has failed to pass on this reduction in VAT (see report). Instead of passing on the reduction in VAT, about a third of all retailers have retained the tax reduction to shore up their balance sheets.
How so? In the UK, retail stores tend to work to the 'price point'. For example, £9.99 is a popular price point. Prior to 1st December, of the £9.99 paid by the customer, the company would have kept £8.50 and remitted to the government £1.49.
When VAT was reduced to 15%, the company had a choice. It could have lowered it's price to £9.77, retained it's cut of £8.50, and remitted to the government only £1.27. Alternatively, the retailer could have retained the price point of £9.99, increased the amount retained to £8.69, and remitted £1.30 to the government. This, it appears, is what many retailers have chosen to do.
The turnover of the retailer has increased by 2.23% courtesy of the tax change, as has the government, who receives an additional 3p for each £10.00 spent at the till. If that isn't an example of bottom feeding, then what is?
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