The automotive industry may see an uplift in sales in the second half of 2010 as some consumers and fleets bring forward their change of car ahead of the 20% VAT rate introduction.
However the Retail Motor Industry Federation (RMI) warns that the short-term gain will be followed by long-term pain as it believes the increase will dent consumer confidence.
The extra VAT will raise the cost of a £15,000 new car by around £375.
The decision to increase VAT by 2.5% on January 4 next year was one of the measures with implications on motor retailers which was announced by Chancellor George Osborne in last Tuesday’s Emergency Budget.
Other measures aimed at reassuring companies included cuts in business tax and changes to National Insurance payments.
Corporation tax, currently 28%, will be cut by 1% per year for four years from next year, bringing it down to 24%, while the small companies tax rate will be cut by 1% to 20%.
To support companies’ workforces, the employers’ National Insurance contribution threshold is to rise by £21 per week, and a new scheme will be introduced which will support new businesses outside London and the south east by making them exempt from up to £5,000 of employer National Insurance payments for the first 10 employees hired.
Chancellor George Osborne said the Emergency Budget deals decisively with the UK record debt and claimed “It’s tough but it’s also fair. This is the unavoidable Budget.”
In terms of personal taxation, Capital Gains Tax remains at 18% for low and middle income earners but increases to 28% for higher earners.
At the RMI, director Sue Robinson said it was pleased the VAT rise does not come into effect until January.
“This will produce a short term stimulus in sales, with buyers bringing forward purchases, which presents an opportunity for consumers and dealers to beat the rise by purchasing or selling over the coming months.
“However, today’s announcement will, in the longer term, damage the recovery and dent consumer confidence.
“The retail motor industry is only just emerging from one of the most difficult periods in recent times and to increase the VAT rate does nothing to help either the consumer or the retail motor sector. Car buying patterns reflect the state of the economy and business will be forced to pass on the VAT increase to the consumer.”
On the business support measures, Robinson said: “The reduction of the small business rate to 20% will encourage enterprise. Furthermore, the gradual reduction of the main rate of corporation tax over the next four years will act as a welcome stimulus for business.
“ However, we are disappointed that the Chancellor has chosen to reduce the annual investment allowances for capital investment to £25k per annum. This will dissuade businesses from making large capital investments, such as replacing heavy truck fleets.”