Retailers are probably losing sleep now thinking about next year. Will there be a recovery?

What about input prices and sterling? And unemployment? And then there is VAT. When the rate suddenly went down to 15% last year, most couldn’t reduce all their prices quickly. Many simply deducted the charge at the checkout in the meantime… or gradually forgot about it and took the margin benefit.

The new year present from the Government is an increase in VAT back to 17.5% on January 1. The timing is surely an example of a bureaucrat’s tidy mind displacing common sense. Are retailers to redirect busy staff over the key holiday period to reprice thousands of lines? Do you try to get all your post-Christmas sales in between Boxing Day and New Year’s Eve, before increasing prices or taking another margin hit on unsold stock?

One thing you can’t do is charge more at the checkout without repricing all your lines individually. No doubt the Government is hoping that retailers will be reluctant to risk repricing, so dampening the inflationary effect. Mind you, manufacturers will probably be trying also to put through their price increases at this point, so that they can be hidden in the VAT publicity and avoid retailers having to increase prices again later.

But that isn’t the only VAT worry stalking retail boardrooms. Will the Government go for an even higher rate? Especially attractive for an incoming Tory administration, it would reduce the strain on politically sensitive income tax rates. Unpopular as it might be, introduced early in a government’s life, there is plenty of time for people to forget… and you blame it anyway on the mess left by Labour. A 20% VAT rate is a nice round number and would bring over £10bn.

This is a very unwelcome thought for retailers. Anybody who thinks of absorbing most of the first increase may well change their mind when they consider a second round.

The food retailers’ nightmare is that if an incoming government standardises VAT rates, abolishing zero rating on food, raising over £20bn. While zero rating food was sacrosanct for political reasons, the current crisis may preclude such luxury. Indeed last year, the Institute for Fiscal Studies concluded that it was not the most efficient form of helping the poor, and could more effectively be replaced by increasing means-tested benefits and income tax thresholds, still leaving a net £11bn gain.

But what about the effect on inflation? This is presently pretty low on the economic worry list. Politicians will expect retailers to absorb some of it, as happened when rates were cut last year. The food retailers have had a pretty profitable recession, eliciting little sympathy for their plight.

So maybe all those sleepless nights about VAT could indeed be just the precursor to a nasty hangover.

  • Simon Laffin Independent retail adviser and non-executive director