Minimum hot pastie price planned for England and Wales

From The Telegraph:

Greggs' shares fell 4pc to 528p on Thursday morning, a day after the Treasury announced in the Budget that: "VAT will also apply, to the extent that it does not already do so, to the sale of hot food, cold food consumed on the supplier’s premises, sports drinks and holiday caravans, and to the rental of hairdressers’ chairs. This will have effect from 1 October 2012."

Greggs, which has more outlets in Britain than any other takeaway company, sells 140m sausage rolls every year. It has successfully argued – following a lengthy and complex VAT tribunal – that the products are baked in store, and just happen to be hot. As a result its hot pastry products have been free of VAT.

A source at the Treasury said: "We want to remove all these anomalies. This is a big step towards simplifying the VAT system." They added that anything that a normal consumer would consider hot, would be deemed by the Treasury to be so and subject to the tax. Most tax experts believe the definition of "hot" is above room temperature.

It is likely that companies will respond by trying to pass on the higher costs – an extra 20pc on these products – to their customers. Though some experts said that it would be difficult when shoppers were watching their pennies. Lorraine Parkin, head of indirect tax at Grant Thornton, said: "At a time when retailers are operating in a very challenging economic environment, this will further reduce their profits unless they are able to pass the tax increase on to their customers.

But... but... aren't investors being completely irrational here? Aren't the politicians always telling us that VAT doesn't affect producers, as the consumer pays the tax? Surely they wouldn't be lying to us, and surely politicians know a lot more about the hot pastie business than mere bakers and pie-eaters?

So why does a VAT increase affect Greggs' profits or share price? Maybe somebody could point out the same to Ms Parkin?