Retailers absorb VAT hike for a limited time

A number of retailers will not pass on the hike in the VAT rate, which rose from 17.5% to 20% at midnight, but this buffer will be temporary and sales will be hit into 2011 according to the British Retail Consortium.

However, some retailers are advertising offers to swallow the rise in VAT for the coming few weeks, following uncertain trading in the run-up to Christmas.

According to the British Retail Consortium (BRC), sales were boosted slightly as consumers made purchases early to escape the VAT rise, particularly on large-ticket items such as TVs. The longer-term effects of the increase are expected to be negative.

Richard Lim, economist at BRC, said: "With the weather and weak consumer confidence undermining the sector's performance in the run-up to Christmas, retailers are discounting in a big way now to make up for missed sales.

"That may mean the impact of the VAT rise is lost among promotional price cuts. But retailers can't absorb the cost indefinitely. In time, the VAT increase will push inflation up and – along with National Insurance rises and public sector job losses – harm sales as the year continues."

Lim said he accepted the VAT rise was "necessary" to reduce the government’s deficit.

Helen Dickinson and Tim Clifford, retail partners at KPMG, said the post-Christmas sales would be "crucial" to December's results but offers would fizzle out.

They said: "Many retailers have been carefully managing their stock positions to protect their margins where possible, in the expectation that Christmas 2010 would not be a blockbuster, irrespective of the weather.

"The industry knows it is in for a tough year ahead. As well as the VAT rise, customers are tightening their belts because they're worried about prospects for their own jobs and personal finances in what are likely to be tougher economic conditions in 2011."

Retailers offering to pay some or the entire VAT hike include the office-supplies provider Staples. It is charging consumers the equivalent of 17.5% VAT on items bought in-store and advertising a number of items on sale.

Volkswagen-owned Seat has pledged to offer customers no VAT at all on its latest range of cars.

Dell, Virgin Active health clubs and DFS have all promised to swallow the VAT rise.

Supermarket shoppers will not be hit on any change on food items, which are VAT exempt. Tesco has pledged to freeze VAT on non-food items until 25 January.

A John Lewis spokesman said the retailer would not implement any VAT rise initially.

He said: "Because of our Never Knowingly Undersold price promise, for which we proactively check and match the online and shop prices of our high street competitors – even during sales – we will be the last retailer to make any price increases."

A Sainsbury's spokesperson said: "Prices in our Home and Lifestyle ranges will not be increased in January. In addition, throughout January to help customers, we will have a major half price promotion, with the most offers ever available in store, with over 800 products at least half price."

At Marks & Spencer, a spokesperson said new prices would be phased in for existing products, but the prices of all new products coming into store in January would reflect the new rate of VAT immediately.

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