There seems little hope that Alistair Darling will back down on his new year VAT rise. So what do retailers need to think about when preparing for the rate change, asks Joanna Perry

Caught short when the VAT reduction was announced last year, retailers have the opportunity to put a bit more planning into the rate hike that is set to come into force on January 1, 2010.

While the British Retail Consortium estimates that the cost of returning the rate from 15% to 17.5% will be less than the £90m it believes the industry spent when it was lowered on December 1 last year, others argue that it could be greater, as some retailers that did not lower their prices when VAT was reduced are expected to now raise prices alongside those retailers that did reduce prices at the time of the cut.

While retailers have no compulsion to change their prices to cover the additional VAT they will pay, at the very least there will need to be a change in whichever part of their head office system they use to calculate the VAT they owe.

The systems change was a major issue for retailers when VAT was lowered, coming at short notice and at a time when systems were locked down for Christmas, but it is likely to be store operations that feel the brunt of the workload when the rate is raised.

Trading Standards Institute prices lead officer Martin Fisher, who is also a trading standards officer in Cornwall, says that with all the work his peers have to do they will not be trying to catch retailers out in the first few days after the VAT change, and they will investigate based on consumer complaints.

Managing expectations

He explains that retailers can’t just up the price at the till to add on the extra VAT without making it clear to their customers, as this would be against the provisions of the Price Marking Order. However, he adds that within the Order there is a provision allowing retailers 14 days to implement a rate change, as long as there are plenty of signs warning customers of the extra tax that is to be added at the till in the mean time.

Fisher says that consumer complaints weren’t an issue when the VAT rate fell, because even if customers did not feel price signage was adequate they were paying less than expected at the tills. The expectation is that consumers will make more of a fuss with prices rising, and there is the added complication of the rate changing at the same time as most retailers will be going on Sale.

Simon Boss, partner at law firm Shoosmiths, says: “As the rates are going up there is more scope for unhappy customers – whether they are genuine or not.”

Richard Goodall, sales and marketing director at EPoS supplier PCMS, says that amending the VAT rate in systems should be easier this time, as retailers have already made the change once.

The main potential problem is for retailers who had the 17.5% VAT rate hard-wired into their system, and then changed to the 15% rate. They will have the most work to do putting it back. As prices are usually set in head office systems and then fed to the EPoS system, the interface between these applications could also be a weak link that will need testing.

One retailer who isn’t worried about how it will handle the VAT change is Fortnum & Mason. It has introduced a product information and ticketing system from Episys that has allowed it to automate the production of new price and product information labels. The system is used on its food floor and is slowly being rolled out to its other departments.

Fortnum & Mason visual presentation manager Paul Symes says that a VAT change on an item is just as simple to deal with as an ingredient change, weight change or country of origin change.

At the point that the ticket with the new price is printed, the price at the till also changes. This allowed Fortnum & Mason to make immediate changes when the VAT rate was lowered.

Store support

Episys marketing director Peter Lewis adds that although the creation of the new price tickets can be automated and done relatively quickly, obviously re-ticketing a whole store can take time.

However, he says the time taken to do this can be minimised if tickets are printed in the order in which staff will walk around the store replacing the tickets. The Episys system can take information from store planograms, to print tickets this way, meaning that staff need little training in order to replace point-of-sale material.

Retailers that do not have such ticketing systems, or who have prices on swing tickets, will have to rely on point-of-sale signage to make their pricing clear. Fisher advises a straightforward approach, asking staff members to walk the shopfloor through a customer’s eyes, and highlight to managers any areas where they feel the pricing signage is not clear.

Boss says that while retailers have time to prepare for the systems and labelling changes that may be necessary, it will be the treatment of exchanges, returns and other customer complaints that will be the most difficult to manage in the immediate aftermath of the VAT change. He advises: “You should have trouble shooters on the shopfloor to deal with these complaints, over and above what you would already have at this time of year.”

Fisher admits: “It’s a bad time of year with Sales etc, so there is the possibility of total confusion.”

Whatever policies you put in place for dealing with returns, faulty items, or complaints about the pricing of goods, it is essential that you articulate this to all shopfloor staff and, in the case of returns, to customers in the run-up to the rate change.

While retailers may have fewer worries about how to execute the rate rise at head office, store staff will have to deal with the customer fall-out.

Making sure the price is right

  • The Price Marking Order 2004 sets out the law regarding how retailers display prices. It requires that prices are unambiguous, easily identified and clearly legible; it is not prescriptive about how those requirements are met
  • The Order requires consumers should not have to ask for assistance to be able to see a price. Retailers must also fulfil their obligations under the Disability Discrimination Act 1995, and the guidance says this means taking into account the needs of the elderly and disabled groups regarding price clarity
  • There is no requirement to price mark items individually
  • Enforcement of the pricing regulations is the responsibility of Trading Standards officers, and the fines for breaking the law in this area can be up to £5,000 per incident in a Magistrates’ Court
  • Shoosmiths associate Phil Ryan says that where a customer has a receipt, retailers can refund at the price paid or offer a replacement for a faulty good, or an unwanted good, depending on their policy. However, he says that where there is no proof of purchase, they are within their right to make a refund at the lowest price the product has been on sale for
  • Richard Goodall, sales and marketing director at EPoS supplier PCMS, says any EPoS system installed in the past seven or eight years is almost certain to print a barcode on the receipt. When an item is returned this allows the EPoS system to identify and bring up the original transaction to make the refund
  • Customers who return an item that’s faulty and receive a replacement should not be expected to foot the bill for any price increase since their purchase
  • If you are marketing goods as marked down, you must use the previous original price in ads, not a VAT-amended one
  • Ryan also warns retailers should meet consumers’ expectations. He points out that if you state you are going to absorb the VAT rise and not raise prices, then you must apply this policy across the board, and not let prices creep up in the weeks following the rate change