VAT cut helpful for UK retail but no panacea

LONDON Mon Nov 24, 2008 1:10pm EST

LONDON Nov 24 (Reuters) - The reduction in VAT announced on Monday will help Britain's troubled retailers but, like recent interest rate cuts, is unlikely to prevent this year's Christmas trading season from being one of the toughest for decades.

The cut in standard-rate value added tax (VAT) on sales from 17.5 percent to 15 percent will take effect on Dec. 1 and run for 13 months, finance minister Alistair Darling said in his pre-budget report. [ID:nLO6260]

Darling said the measure will give 12.5 billion pounds ($18.6 billion) to consumers and called on retailers to pass it on in their prices immediately.

The government hopes the measure will stimulate spending and shorten the recession.

However, analysts said although the measure will likely give a modest boost to Christmas sales volumes, its impact will be limited given retailers were already discounting massively to kick-start trading, subdued by rising unemployment, falling house prices and tight credit.

Last week Marks & Spencer (MKS.L), Debenhams (DEB.L) and Philip Green's Bhs and Arcadia stores all launched sales offering price reductions of 20 percent or more.

"A big cut in VAT before Christmas would normally be something to get excited about, but if consumers are not going to want to pay full-price for anything any more, any benefit to gross margins will be swamped, particularly given the surge in import cost prices for next year," said Nick Bubb, retail analyst at Pali International.

"And a pick-up of 1 percent to 2 percent in volumes won't make much difference to retailers who have been seeing sales fall by as much as 15 percent to 20 percent." Bubb also noted the reversal of the VAT cut in 2010 may be impossible to pass back to the consumer.

Stephen Robertson, director general of the British Retail Consortium, said the VAT cut would provide a "modest but welcome boost" for cash-strapped households.

"But the Chancellor (Darling) himself says we will still be in recession at the end of 2009. He must consider whether that will be too soon to put VAT back up and this must be just one of a range of reviving measures including cuts in income tax and interest rates.

Robertson said the "fiercely competitive climate" meant retailers would pass on the cut in VAT to consumers but that it would be difficult for them to do so in seven days and at their busiest time of year.

"System changes, replacing shelf labels and stickering-over prices on packs will be a mammoth and costly task," he said.

(Editing by Sharon Lindores)