January 2011’s VAT increase to 20% is likely to have a relatively small impact on retailers, according to the KPMG/Synovate Retail Think Tank (RTT). Postponing the VAT rise until January 2011 provides valuable time for retailers to plan pre- and post-Christmas promotional strategies, which could provide a positive short term impact on margins.
However, the retail analysts warn that the increase could trigger wider economic changes, which would adversely impact on consumer spending.
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 tough 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.”