Retailers promise to soften VAT increase blow

Retailers are promising to soften the blow of the VAT increase for consumers who are already preparing to slash their spending throughout 2011.

Retailers have been hit hard by plummeting consumer confidence topped off by the widespread snow that kept shoppers away from the high street during much of the crucial Christmas trading period.

And sales figures showing an increase in big-ticket purchases ahead of tomorrow's increase suggest many consumers are preparing to tighten their belts as they head in to the new year, according to analysts.

Many retailers have pledged to absorb or delay tomorrow's VAT hike of 2.5% but admit they can only defer higher prices for so long.

Department store Debenhams said it would not increase VAT "across the board" tomorrow, and the higher prices will be limited to new season products arriving in store over the coming months.

A spokeswoman 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 summer 2011 prices."

Marks and Spencer said it was doing everything it could to ease the transition for customers.

A spokesman said: "We are doing everything we can to mitigate the effects of increased cost pressures, including rising commodity and distribution prices as well as the increase in VAT.

"Where we can, we are keeping opening price points the same to give our customers the best value for money. 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 into store in January will reflect the new rate of VAT from January 4."

Tesco said it was freezing VAT on all non-food products in its seasonal sale until January 25, while Asda promised customers would "hardly notice a thing".

Asda chief executive Andy Clarke said: "We're keeping things simple as always at Asda. The price customers see on the shelf in January will be the price they'll pay at the till and we've been working hard behind the scenes to make sure customers hardly notice a thing."

Health and beauty chain Superdrug is to absorb the VAT rise on 2,000 of its own brand items, saving customers an estimated £3 million a year, it claims.

Steve Jebson, Superdrug's commercial director, said: "Absorbing the cost of the VAT hike on our own products ensures that customers can continue to trust that we'll always do everything we can to offer the best deal."

British Retail Consortium spokesman Richard Dodd said: "Customers won't suddenly see prices shooting up overnight because there is massive discounting going on, so the full impact of the VAT rise will in many instances be lost.

"But of course retailers will have to pay the new higher figure to the Chancellor from Tuesday and they'll only be able to absorb the impact of the increase for a limited period.

"Customers will start to see increases as the post-Christmas sales end from the end of January and into February, gradually from that point.

"As the year continues there is no doubt that the VAT rise will push up prices and undermine demand."

But Mr Dodd added that retailers accepted that they and their customers had a part to play in lowering the deficit.

He said: "Looking at the wider picture we do reluctantly accept that the VAT rise has to be part of the Government's moves for tackling the deficit."