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VAT may be pushing up prices earlier

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Some businesses may be looking at raising their prices sooner rather than later in anticipation of the VAT hike set for January next year.

The standard rate of VAT will rise from 17.5 per cent to 20 per cent on 4 January 2011.

However, a recent poll by Kreab Gavin Anderson, the financial communications and media relations consultancy, found that the majority of larger retailers questioned in the survey plan to pass most of the costs on to consumers.

That some are starting to raise prices early suggests that businesses do not believe their margins will be sufficient to absorb the 2.5 per cent rise.

One in five of respondents were a little less hawkish, saying that they would add only a fraction of the increase to prices.

Businesses are being warned that HM Revenue and Customs will use anti-forestalling rules to prevent firms from charging the 17.5 per cent rate on services that will be delivered after the 4 January change-over date.

VAT-registered businesses that are members of annual accounting and flat rate schemes need to understand their responsibilities when the change comes into effect too.