Dec 8, 2009
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Tesco says reversing VAT cut won't derail recovery

Dec 8, 2009

By Mark Potter

LONDON (Reuters) - Reversing last year's cut in VAT sales tax will not derail the consumer recovery, but any further increase would be a strain for shoppers, the finance director of Tesco (TSCO.L), Britain's biggest retailer, told Reuters.

The British government is expected to announce on Wednesday 9 December that it will return VAT to 17.5 percent in January, having cut it to 15 percent last year. But economists warn it will need to raise taxes further to plug a hole in public finances.

"I don't think that the impact will reverse the trend in customer confidence," Laurie McIlwee said in a telephone interview on Tuesday 8 December.

"If the VAT goes above that (17.5 percent) it could be more negative. Just as consumers are getting more confident, to start indirectly taxing people will be a strain on their budgets."

Earlier on Tuesday 8 December, Tesco reported a rise in third-quarter sales, but towards the bottom of expectations.

McIlwee said sales of non-food ranges like electricals, toys and clothes were now growing as strongly as food, and that Tesco's upmarket Finest range had also returned to growth, adding to signs of a consumer recovery.

Growth was held back by a fall in food price inflation, he said.

Prices were likely to remain flat, but a small amount of deflation would not be a problem, he added.

McIlwee said Asian markets were performing well, that European markets were recovering and Tesco's U.S. business had responded well to a new marketing drive, with like-for-like sales growing.

Tesco had "no plans" to look at Dutch rival Ahold (AHLN.AS), he said, when asked to comment on an analyst report which linked the two businesses.

(Editing by Kate Holton)

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