VAT increase shouldn't be a reason to buy, buy, buy

Spending now to beat January's tax rise is foolish

Next year's big music festivals got busy this week flogging thousands of tickets to eager music fans. T in the Park and V Festival were among those releasing swathes of 2011 tickets much earlier than usual. The bulk of tickets will go on sale next March. The selling point this week was that fans could buy their tickets now and save the VAT.

In the next few weeks you'll see more exhortations to spend now and save cash ahead of the VAT increase. It's set to rise to 20 per cent on 4 January as part of the Coalition Government's squeeze on our cash. The increase will add 2.5 per cent to the cost of many goods and services so buying now to avoid the higher price can, on the face of it, seem sensible.

But is spending now to save later actually a wise financial move, or is it a false economy? "It's very tempting to buy now to avoid the upcoming VAT increase, but you should remember that you are only saving money if you are buying something that you need and can afford," Annie Shaw, of the personal finance website CashQuestions.com, warns. "Anything else is simply a waste of money in the long run. You should also remember that many retailers will absorb the VAT increase in their profit margins at first so prices won't necessarily rise for the consumer immediately, particularly during the January sales period."

Ed Bowsher, of Lovemoney.com, agrees that rushing to spend now could be a mistake. "The VAT rise may not have the negative impact that so many people fear. In a competitive market, retailers will inevitably take some of the hit and reduce their margins a little," he says. "We'll probably see plenty of 'Don't pay the extra VAT' offers in January. I also suspect that the recovery has built up enough momentum now, so the VAT rise won't push us back into recession."

On the other hand a report published by the marketing firm Acxiom last week suggests UK households will be worse off to the tune of £6.2bn next year as the impact of the VAT increase bites. The average family will be £225 a year out of pocket, the report suggests. with those in Hull, Gwent, Stoke-on-Trent, Leicester and Middlesbrough set to end up worse off because of the increase.

Another report from Santander Insurance claims that millions are rushing to beat the rise. It suggests that 13.75 million UK adults (28 per cent of the population) plan to go on a shopping spree in the next few weeks in advance of the VAT increase, spending on average £650 each. Two-fifths of people plan to splash out on electronic items, such as iPods, iPads, mobile phones and TVs, according to Santander's research.

If true, that would represent an alarming proportion. With belt-tightening rife across the country the idea that millions are planning to treat themselves in an effort to save money would be monstrous, if it wasn't so laughable. What the research may reveal, however, is that people are planning to pull forward buying what they think of as bigger ticket items in order to save money.

As is often the case with spending, it's easy to persuade yourself that buying now is a good idea. But just because you want something, that doesn't mean you should buy it, and even the idea of saving a few quid shouldn't make a difference.

Take the 10,000 music fans who rushed to snap up V Festival tickets this week. (It's too late now, by the way. The deadline to apply was noon on Friday.) The tickets were priced at £165 for a weekend camping pass and £140 for a weekend non-camping pass.

Presumably, when the bulk of tickets go on sale next March they will include VAT at the 20 per cent rate. That would mean they'd be sold at roughly £168 and £143. In other words, you'd have saved around £3 by buying early and avoiding the VAT rise. Hardly seems worth the effort, does it? Especially as you could simply put the cash on deposit, earn a quid in interest, and then decide next spring whether you'd like to go to the summer festival.

In short, the most sensible advice is to ignore the VAT increase and only buy what you have already planned. However, if you have already decided to spend thousands in the spring, buying now could clearly prove worthwhile as the VAT increase effectively adds £212 to every £10,000 you spend.

So if you plan to buy a new car, an expensive UK holiday, or splash out on home improvements in the spring, paying now could mean slashing hundreds off the eventual cost.

But be wary. For starters, if you only pay the deposit for services or a holiday before the VAT increase, you'll be charged the 20 per cent rate on the balance you owe. That could tempt you to pay the full amount now but doing so could risk losing thousands if the trader or company goes bust or fails to do the work. That's particularly risky with builders.

If you can, use a credit card to pay: then you'll be protected through section 75 of the Consumer Credit Act. As long as you spend between £100 and £30,000 on a credit card, you can claim against the card issuer if the supplier goes out of business or disappears.

What do you pay VAT on?

There are three different VAT rates: standard (which is rising to 20 per cent); reduced (staying at 5 per cent); and zero (also unchanged).

Standard rate

* Charged on most business transactions, whether you're buying a car, music tickets, or paying for a service, such as an electrician

Reduced rate

* Domestic fuel and power

* Installing energy-saving materials

* Sanitary hygiene products

* Children's car seats

Zero rate

* Food – but not meals in restaurants or hot takeaways

* Books and newspapers

* Children's clothes and shoes

* Public transport

You can find a full list of VAT rates at www.hmrc.gov.uk/vat/forms-rates/rates/goods-services.htm