Page last updated at 14:17 GMT, Thursday, 31 December 2009

Shoppers face confusion over VAT rise

The cut in VAT is estimated to have boosted spending by 6.8bn

Shoppers are facing the last day of the lower rate of VAT, although many retailers have said they will not increase prices on 1 January.

VAT is set to return to 17.5% in the new year after being reduced to 15% on 1 December 2008.

The government cut VAT in an attempt to boost spending in the recession.

But several retailers have said that they will delay passing on the higher rate, while others say they will absorb the cost of the increase.

The Centre for Economics and Business Research (CEBR) estimates that the 13-month tax cut helped boost consumer spending by £6.8bn, although the British Retail Consortium (BRC) says it has had a "very limited effect".

However, the CEBR warned that the first few months of 2010 could be tough for retailers, as spending may be affected by the increase in VAT and rising inflation.

Fake freeze?

Supermarket giants Tesco, Sainsbury's and Asda have all said that they will delay passing on the increased rate on thousands of products.

But Tesco has been accused of raising prices ahead of the tax rise.

A report in the Daily Mail claims that Tesco, Boots and Morrisons have all increased the prices of certain items in recent weeks.

Tesco told the newspaper its price changes had "no link whatsoever" to the VAT increase.

"A small proportion of products will have increased in price but this is either because of special offers coming to an end or an increase in the cost price. Many more prices have fallen than increased," a Tesco spokesperson said.

Boots said it benchmarked its prices against other retailers.

Morrisons, which has not claimed that it would freeze VAT, said prices vary throughout the year "reflecting costs and promotional changes".

Absorbing costs

Meanwhile, Argos and John Lewis both say they will not raise prices until the end of January.

Arcadia Group, which owns Topshop, Dorothy Perkins and BHS, has said it will absorb the cost of the increase in all of its stores.

But Marks and Spencer will raise prices on all general merchandise from 1 January and on food items on which the tax is paid from 11 January.

Shoppers will not notice a difference on price tags, though, as the retailer never displayed the VAT reduction on tags, instead giving customers a 2.5% discount at the till.

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