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Temporary VAT cut will provide boost to only some retailers, analysts say

Deutsche Bank said the reversal in VAT rate will likely see prices jump by more than the drop

DFS Furniture - Temporary VAT cut short-term benefit but prices to spike next year, analysts say
Rishi Sunak

Chancellor of the Exchequer Rishi Sunak is mulling over policies to support the economic recovery that could potentially be announced in an emergency Budget statement in July.

These may include a cut to VAT by two and half or three percentage points to 17.5% or 17%, similar to the cut pushed through during the height of the global financial crisis, in a bid to inject a consumer spending boost for certain sectors, according to reports.

The Chancellor may also be looking at cutting employers national insurance contributions and an extension to the business rates relief scheme, were also suggested as possibilities.

All retailers would benefit from a VAT cut, said analysts at Peel Hunt, but the move would be most likely to convince consumers to go for bigger purchases such as sofas, electricals, home improvement and cars.

As such, the best placed companies would be DFS Furniture PLC (LON:DFS), SCS Group PLC (LON:SCS), Topps Tiles PLC (LON:TPT), AO World PLC (LON:AO.), Dixons Carphone PLC (LON:DC.) and the car retailers such as Pendragon PLC (LON:PDG) and Lookers PLC (LON:LOOK), the analysts said.

“The mood music suggests retailers may get a good level of support from the summer Budget statement. Our sense is that rates are unlikely to come back in their previous form regardless, particularly given the collapse in rental values.

“All this suggest the sector can continue to recover well into the key autumn period, albeit we continue to expect to see ongoing fallout from the weaker, less consumer-relevant retailers that were already on shaky ground coming into this.”

Higher inflation next year

Economists at Deutsche Bank said the UK would be likely entering deflation territory in late summer through to the turn of the year if the Chancellor does announce a VAT cut next month.

However, they pointed out that the eventual reversal in the VAT rate would be likely to result in prices jumping by more than the drop.

“Past episodes of temporary VAT cuts have shown that the price impact from changes in VAT tends to be asymmetric, as firms are more reluctant to pass through price cuts than price rises,” analysts noted.

“Therefore, a gradual pickup in inflation by the end of the year is likely, with prices seeing a bigger jump in June/July of 2021 as the VAT rate cut fully reverses.”

In this scenario, the consumer price index would rise past the Bank of England's 2% target by the end of 2021.

In the short term, the cut would bring the UK to deflation territory in late summer.

Quick facts: DFS Furniture

Price: 155 GBX

LSE:DFS
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Market Cap: £395.82 m
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