Consumers overestimate VAT hike

Consumers believe that the forthcoming VAT increase will add more to shop prices than it actually will, a new study has claimed.

VAT is due to climb 2.5 per cent to 20 per cent in January 2011.

The survey found that, of those polled, nine out of ten consumers were aware that VAT is about to rise but only just over half (53 per cent) knew when.

What's more, shoppers tended to overestimate the impact the increase will have on prices.

Some 25 per cent thought that the rise would lift the cost of a £5 item to £6, when in fact the increase would only be to £5.11. The average estimate was a price hike to £5.52, five times higher than the actual cost rise.

Just 15 per cent of those polled got the correct answer.

Stephan Butscher of Simon-Kucher, the pricing and marketing strategy firm that conducted the survey, said: "Businesses should use this VAT increase as an opportunity to analyse their pricing position more accurately.

"Surprisingly, many firms pay very little attention to the overall strategic impact of VAT amendments. Considering how much profit is at risk, rigorous management attention is essential."