The VAT increase may undermine UK retail sales in the year ahead

The VAT increase may undermine UK retail sales in the year ahead

A group which represents UK retailers has warned that a rise in VAT, which came into force at midnight (4 January), will harm sales as the year continues.

The VAT increase from 17.5% to 20% is part of the Government's package of measures to straighten out the public finances.

But the British Retail Consortium (BRC) fears that even if retailers can absorb the extra cost for a time, it will filter through to prices and play a part in undermining retail sales in the year ahead.

"The prospect of the VAT rise gave a modest boost to the sales of big-ticket and high-end goods in December as people brought their buying forward," explains British Retail economist Richard Lim.

"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."

A separate survey from the BRC last week forecast that a majority of UK retailers predict a decline in business in 2011, with weak consumer demand and inflationary pressures among their biggest concerns.

Nearly two thirds of retailers responding to its Retail Prospects for 2011 snapshot survey said they expect retail sales to worsen compared with 2010. Eighteen per cent expect an improvement.

Despite these immediate fears, retailers continue to focus on the long-game, with 47% planning to go on investing and maintaining or creating jobs in 2011.