VAT hike 'will drive down spending'

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The rise in VAT will drive down retail sales this year, analysts predicted

The 2.5% rise in VAT will drive down retail sales this year, analysts have predicted.

As announced in the Chancellor’s Emergency Budget earlier this year, the standard rate of VAT will increase from 17.5% to 20%.

The change affects any VAT-registered business that sells or purchases goods or services that are subject to the standard rate of VAT.

Most foodstuffs, children’s clothing and books will remain zero-rated and reduced rates will remain on items such as children’s car seats and supplies of domestic fuel and power.

Some business groups have unsuccessfully called on the Government to delay the increase because of the recent Arctic weather, which hit retailers in the normally busy run-up to Christmas. There have also been warnings of job losses, especially in the building industry, where firms fear there will be reduced demand for domestic repair and maintenance work.

Online shopping group Kelkoo predicted that consumers will spend £22.5 billion in the January sales, an increase of £360 million, or 1.6%, on last year. Shoppers will spend an average of £370 each but many will then rein in their spending for the rest of the year, signalling another period of austerity for the retail industry, said Kelkoo.

It added that the New Year sales could be a “last hurrah” for retailers before the VAT hike, which will make running a car, paying household bills and buying clothes more expensive.

A report by the Centre for Retail Research and Kelkoo predicted that UK retail sales are expected to fall by £2.2 billion in the first three months of 2011 as a direct result of the VAT increase. Consumers will spend an average of £324 less this year as a result of the tax hike and many have been buying goods such as electrical items and clothes to beat the rise, said the report.

British Retail Consortium spokesman Richard Lim said: “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. 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 amongst discounts, but ultimately retailers can’t absorb the cost indefinitely.

“It will push inflation up and, along with National Insurance rises and public sector job losses, harm sales as the year continues. But, we do accept that the VAT rise, with substantial public spending cuts, is necessary as part of the Government’s package to tackle the deficit.”

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