Retail recovery remains on course despite VAT rise

Shoppers were targeted in the Budget with the biggest increase in tax revenue to come from the VAT rise from 17.5% to 20%. The Budget has been described as the most severe in peace-time Britain, and Chancellor George Osborne said everyone will have to “pay for the past and plan for the future”.

While the VAT rise is unwelcome to retailers, many believe it is necessary to reduce the deficit and ensure the long-term stability of the country. Asda chief executive Andy Clarke called the budget “brave” and welcomed the January 4 start date, saying “it’s a good thing for retailers so we can prepare”.

But others believe the Government should have imposed the rise on February 1. Sainsbury’s chief executive Justin King said: “The date of the change is somewhat disappointing as it is so soon after Christmas and right in the middle of the January Sales period.”

The move to protect categories such as food and children’s clothing from VAT was a welcome relief. Morrisons chief executive Dalton Philips said: “VAT was an obvious target but we are pleased it has not impacted on food as that would affect the poorest in society.”

Shore Capital analyst Clive Black claimed that the grocers would be best placed to gain share in non-food: “We see the space growth, improving capability and strong value credentials of the food retailers as making the food-based superstore groups well positioned to capture share in the 20% VAT era.”

Retailers need to decide how much of the VAT rise they pass on to customers, with many having taken as much cost out of their businesses as possible already. The Office for Budget Responsibility believes retailers will only immediately pass on two-thirds of the £12.1bn pain the VAT increase will bring.

Poundland chief executive Jim McCarthy said he would be “re-engineering” Poundland products and is “reviewing ranges” in the face of the VAT rise. He said he would pull products off the shelves if “it doesn’t make sense” to sell them.

Big-ticket retailers could suffer next year as shoppers pull forward purchases. Ikea UK and Ireland boss Martin Hansson said: “It’s going to be a tough time ahead for consumers.”

Aurora chairman Derek Lovelock said the VAT rise will lead to a “bumper Christmas” with many purchases being brought forward but added that it will be “one hell of a hangover” in the new year.

However, there are fears the scale of the public sector cuts - to cut spending 25% by 2014 - and the possibility of job losses to be revealed in October may hit consumer confidence.

Lovelock said the cuts in the public sector could lead to heavy job losses, which will impact consumer spending and mean “there will be pressures on both sales and margins for the foreseeable future”.

N Brown chief executive Alan White said some lower income customers would be better off as some are excluded from income tax, and the pay freeze announced across the public sector will not include those earning under £21,000.

More widely, retailers welcomed plans to lift the National Insurance threshold, and reduce corporation tax. Harvey Nichols chief executive Joseph Wan said the move is “business friendly” and added: “The Budget is certainly moving the country in the right direction.”

Grocers also welcomed the possibility that Osborne will look at how to stabilise fuel prices.