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New research has suggested that the 2.5% rise in UK value-added tax (VAT), scheduled for next January, will have 'minimal impact' on the health of the retail sector.

However, the KPMG/Synovate Retail Think Tank (RTT) White Paper says the VAT rise could also inadvertently act as a catalyst for wider economic changes that may adversely affect retail spending.

"The rise in VAT to 20% in January 2011 is far from welcome news for the retail sector, which has been at the sharp-end of the economic downturn and deep recession for the past two years, and takes the UK from having one of the lowest rates in Europe to being mid-table in the list of 27 EU countries," the report observes.

"It is estimated by the Office for Budget Responsibility that the 2.5% increase will raise revenue of GBP12.1bn in 2011, rising to GBP13.4bn by 2014/15. This will come out of consumers' pockets or reduce business profits, although this includes all products and services which are subject to VAT, so not all of the impact will be felt in the retail sector," the study adds.

However, according to the study, a rise in VAT was preferable to a sharper increase in direct taxation which could have come out of the Chancellor's emergency budget, making it the “least worst” option for the sector.

And while the timing of January 4, 2011 for the new rate presents challenges for retailers, coinciding with the busy post-Christmas sale period, it was preferable to a more immediate increase, shortly after the budget or over the summer, as it provides retailers with valuable time to plan.

The RTT believes that retailers "have no choice" but to pass more than half of the cost to consumers and, due to the highly competitive nature of the industry, absorb the remainder themselves or share it with suppliers.

They will be preparing for the rise over the rest of the year by building the change into their pricing structure ahead of the year end and pushing promotional strategies in the lead up to, and post, Christmas, both of which should provide a short term fillip to sales and a positive impact on margins. At least some of this benefit will go towards covering the cost of making the change, the report notes.

Overall, the RTT considers that values will hold up well but that volumes will be impacted to an extent. However, it concludes that the direct consequences of the VAT rise in isolation will be much less significant than the wider consequences of the other fiscal changes, which will have a far greater impact on consumer spending.

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