Prices to go up after VAT rise squeeze

RETAILERS may be promising to bear the brunt of the VAT rise but consumers will be hit by higher prices over time, experts said yesterday.

Large retailers such as Tesco, Marks & Spencer and Sainsburys have rushed to promise consumers they will not bear the burden of the tax rise from 17.5 to 20 per cent.

But once January sales are over prices may well rise as firms struggle to retain profit margins, according to Lorraine Parkin, head of VAT at accountant Grant Thornton.

“In certain sectors retailers will probably take on the VAT increase and will not immediately raise their prices, so the differential will be a slight hit to their profits,” she said.

“It might not be in force for a few weeks but we will see this passed on.”

The increase is expected to cost UK households about £520 per year and raise £13bn for the Treasury this year.

An electrical retailer told City A.M. that although it anticipated a small reduction in sales after the rise, the aspirational nature of electronic goods meant sales would “level out over about a six week period.”

“A rise like this won’t put someone off buying a new television if they have their heart set on it,” they said.

A new survey by Lloyds TSB Commercial found retailers more worried than other sectors about waning domestic demand in 2011. “Many businesses will be planning price increases to keep profits at current levels,” said Lloyds TSB Commercial managing director John Maltby.