In the wake of the Government’s pre-budget report announcing a reduction in the rate of VAT from 17.5 % down to 15%, Fashionista sets out below a practical guide for retailers about the impact of the VAT reduction, which will apply from 1 December 2008:

1) Is there any obligation to pass on the reduction to customers?

The short answer is NO. HMRC has issued guidance explicitly stating that, whilst businesses are strongly encouraged to pass on the reduction, there is no obligation to do so. This is consistent with raft of consumer law in this area.

2) What if the retailer DOESN’T pass on the reduction?

Retailers may not want to pass on the reduction (at least not immediately) for a number of reasons, including the logistical nightmare (and cost) of repricing goods and services, amending billing systems and changing advertising and marketing materials, particularly at such short notice.

Perhaps the main issue is one of potential negative publicity, and its impact on brand value and sales. However, retailers (particularly those who operate exclusively online) should also consider what their consumer terms & conditions say. Normally, where terms & conditions change (including prices), customers must be given notice of the change and, if the change disadvantages them, given a right to terminate. Depending on how a retailer’s Ts&Cs are drafted, failure to pass on the VAT reduction could constitute a change in price which disadvantages customers, even though the headline figure doesn’t change, because the amount of revenue retained by the client will increase. Under the Distance Selling Regs (which apply to any etailer or retailer selling through a catalogue), businesses must set out the price of goods or services including taxes. However, except in specific industries (such as insurance), there is no obligation to set out how much the tax element of the price is. Therefore, if the reduction is not passed on, clients are unlikely to have to reprint their price lists and other marketing material.

3) What if the retailer DOES pass on the reduction?

While this is the most desirable option from a PR perspective, it does pose significant practical problems. For most of the high street retailers, the task of re-pricing all stock is a logistical nightmare. As Drapers reported yesterday, while most of the UK’s major retailers are intending to pass on the 2.5% reduction, many are planning to take off the discount at the till point rather than by re-ticketing stock.

From a legal perspective, this raises an interesting question about the application of the recent Consumer Protection from Unfair Trading Regulations 2008, which make it a criminal offence to give a misleading price indication. The Regulations provide that retailers are exposed to potential criminal liability if they mislead consumers as to price. When these Regulations came into force earlier in the year, BERR issued guidance which stated that, in the event of a change in the rate of VAT, businesses would have 14 days from the date of the change (i.e. from 1 December) in which they could merely use “a general notice or notices” to avoid giving misleading price indications to consumers. This could imply that all materials displaying incorrect prices should be replaced by 15 December to avoid the risk of prosecution.

Fashionista has learnt that one high street retailer intends to place signage at the till point informing consumers that the VAT reduction will be discounted at the till, so that the price as shown on the ticket includes VAT at the old 17.5% rate. On the basis that other retailers intending to take off the discount at the till will use similar signage, they should be able to escape criminal liability under the Regulations. This is because, to attract criminal liability, a retailer must:

(a) knowingly or recklessly engage in a commercial practice which contravenes the requirements of professional diligence, AND
(b) the practice materially distorts or is likely to materially distort the economic behaviour of the average consumer with regard to the product.

In this scenario outlined above, Fashionista doesn’t think either limb is fulfilled. “Professional diligence” is a defined term which refers to the special skill and care reasonably expected of a trader, commensurate with honest market practice and the general principle of good faith. A retailer who is seeking to pass on the VAT saving and using signage at the point of sale to inform is customer is not acting in bad faith. Further, the second limb, would be fulfilled only if the consumer would not acted differently had he known the correct price. Fashionista can’t imagine too many shoppers complaining that they have paid less than the ticketed price.