Retailers fear tough year as VAT rise kicks in

After one of the toughest pre-Christmas trading periods due to the snow, shoppers sought bargains in the January Sales ahead of the 2.5% hike in VAT to 20% today.

Some retailers are set to absorb the rise initially but will pass the costs on to shoppers eventually.

The British Retail Consortium, which found that four out of five retailers think the increase will undermine sales with nearly two-thirds polled saying that 2011 will be a worse year for sales than 2010, said: “The prospect of the VAT rise gave a modest boost to the sales of big-ticket and high-end goods in December.

“Retailers are discounting in a big way now to make up for missed sales [caused by the snow]. That may mean the impact of the VAT rise is lost amongst discounts, but ultimately retailers can’t absorb the cost indefinitely.”

Tesco said it would freeze VAT on all non-food products in its Sale until January 25.

A spokesperson for Marks & Spencer said: “Where we do need to raise prices for products that are already in store, we will phase these in over the coming months. The prices of all new products coming in to store in January will reflect the new rate of VAT.”

David Barford, director of selling operations at John Lewis, which will not pass on the VAT increase immediately, said: “The austerity cuts and VAT hike are going to bite, undoubtedly.” He said he expected the department store business to have a “reasonable” year because of strong loyalty from customers for its brand.

Debenhams said that it would not increase VAT across the board straight away and that higher prices would be limited to new season stock as it arrives in stores.

However, clothing retailers which are also contending with increased input costs from a hike in the price of cotton, labour and freighting, have indicated that in reality price increases are likely to be between 5% and 8% for spring 11.

A spokesperson for Debenhams added: “We will aim to keep price increases to a minimum but there are cost pressures in our supply chain, including higher VAT, which will be reflected in some of our spring 11 prices.”

Labour leader Ed Miliband lambasted today’s VAT increase and said that it would lead to 250,000 job losses and cost average families almost £400 per year.

The 2.5% rise, which will generate almost £13bn for the Treasury to help cut the deficit, is to cost the average household £7 a week, according to Miliband.