Next January’s VAT increase to 20% will have a relatively small impact on retailers and should even provide a short term boost to the sector, according to the KPMG/Synovate Retail Think Tank (RTT).
However, the panel of retail industry commentators warns that the real danger for the sector is that the increase could trigger wider economic changes, which would adversely impact consumer spending.
According to the RTT, the rise in VAT was preferable to a sharper increase in direct taxation making it the “least worst” option for the sector. Despite the timing of 4 January 2011 presenting an extra burden for retailers at their busiest time of year, it provides valuable time to plan and allows pre and post-Christmas promotional strategies to be implemented, which could provide a short term fillip to sales and a positive short term impact on margins, although some of this will be offset by the cost of making the change.
But while January was chosen for the VAT rise as it was hoped that inflation would be under control and falling by then, with the recovery gathering momentum, the RTT warns that this may not necessarily be the case.
Helen Dickinson of KPMG said: “Retailers’ need and desire to increase prices in advance of the rise, in order to protect margins which have been severely affected over the past two years, may have an impact upon the headline inflation figures.
“This, coupled with rising food prices and the additional supply led pressures already in the market, will create pressure for interest rates to be raised. Such a scenario would create a far more dramatic squeeze on consumer income which in turn would threaten spending levels far more significantly than the VAT rise in isolation.”
Source: KPMG/Synovate Retail Think Tank (RTT)
