Analysts claim the impact on the sector could actually be positive

VAT rise the ‘least worst’ option for retail

Next January’s VAT rise will have a relatively small impact on retailers and could even provide a short-term boost to the sector, the KPMG/Synovate Retail Think Tank claims.

The only real danger is that the increase could spark wider economic changes, which would affect consumer spending.

According to the RTT, the rise in VAT is preferable to a sharp increase in direct taxation, making it the "least worst” option for the sector.

The timing of 4 January 2011 gives retailers time to implement pre- and post-Christmas promotional strategies, which could provide a short-term buffer for their margins.

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.”

The RTT claims retailers will have to pass more than half of the cost on to consumers and, either absorb the rest themselves or share it with suppliers. Values will hold up well, but volumes will be impacted to a certain extent.

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