Lower VAT rate comes into force

VAT is coming down but just for 13 months

Thousands of shops and businesses across the UK have lowered their VAT rates from 17.5% to 15%.

Chancellor Alistair Darling announced the cut in his pre-Budget report in a bid to encourage consumers to spend more and boost the economy.

It is estimated the change will cost the Treasury around £12.5bn and save the average earner around £170 a year.

But retailers say it will cost £300m during the next two years to cover the expense of implementing the change.

The 2.5% cut will last until 31 December 2009.

Mr Darling had urged retailers to pass on the reduction as soon as they could and a number of major stores, including John Lewis and Tesco, implemented the change early.

DSG International, owner of Currys, PC World and Dixons.co.uk, passed on the cut in full at midnight on the day Mr Darling announced the measure.

'Unwilling'

BBC business correspondent Joe Lynam said that with many retailers already slashing prices to lure shoppers in the run-up to Christmas, a small reduction in price tags may not have the desired impact.

He said: "Just as banks were slow to pass on interest rate cuts, retailers might be unwilling or unable to pass on VAT cuts."

Richard Dodd, from the British Retail Consortium (BRC), said although VAT had been reduced by 2.5%, the impact on prices would be an actual reduction of 2.1%.

HOW VAT CUT AFFECTS PRICES Mars bar - down 1p JVC LCD television - down £12.77 Levi's jeans - down £1.49 Next suit jacket - down £3 Ford Focus - down £322

He said: "Most retailers, especially major retailers, will be passing this reduction on, but I think they won't necessarily all be taking the 2.1% off the price.

"Some will concentrate the reduction in a more targeted way, reducing certain items by more.

"Some may also reduce the price at the till, rather than reducing the price displayed on the shelves."

Last week, his colleague, the BRC's director general Stephen Robertson told the BBC: "Shops will cope, but implementing a new VAT rate in just a week will be exceptionally difficult for customers and retailers at their busiest time of year.

"I don't think it do a great deal in terms of producing extra sales for our business "

"IT system changes and replacing shelf labels and stickering-over prices on packs will be a mammoth and costly task.

"Small retailers will find all this particularly difficult to accommodate."

Your tax questions answered

The Department for Business Enterprise & Regulatory Reform's code of practice allows companies to pass on the reduction at the till for two weeks into December - and it is believed that many smaller firms will take advantage of this.

The Treasury said that the cheaper products are part of a package of measures which, taken together, should boost the economy.

Our correspondent said: "But with the budget deficits set to reach £118bn next year, these VAT cuts might prove to be a very expensive gamble."

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How on earth is a 2.5% cut going to make any odds when most of the shops are offering far bigger discounts and that doesn't seem to be working?

John, Bedford

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The government has already admitted that some small businesses could also be worse off as a result of the new rate.

Firms which take advantage of the government's flat-rate VAT scheme will now only keep a lower proportion of the VAT they collect from customers.

HM Revenue & Customs said that firms would benefit from paying a lower VAT rate on their expenses.