VAT cut slashes Xmas shopping bill
Updated on 24 November 2008
Christmas shopping will be cheaper this year thanks to a temporary 2.5% cut in VAT announced in the Pre-Budget Report, but purchasers of alcohol, cigarettes and fuel will not share in the savings.
A 13-month reduction in VAT from 17.5% to 15% announced by Chancellor Alistair Darling will come into effect on December 1 and cost the Treasury an estimated £12.5 billion.
But the Chancellor introduced separate increases in duties on drink, cigarettes, petrol and diesel which will offset the reduction, so they end up costing about the same.
And the Treasury revealed that these duty hikes will remain in place after VAT returns to 17.5% at the beginning of 2010 - leaving drinkers and smokers paying 2.5% more in the long run.
The cut in VAT - which brings in £83 billion to the Treasury in a normal year - forms part of a "fiscal stimulus" package designed to inject new vigour into Britain's economy.
Mr Darling hopes that by putting more money into consumers' pockets, he can encourage them to spend more and keep British shops and manufacturers in business.
But there are concerns over the cost to business of changing price tags and accountancy systems to take account of the change. A Treasury document estimates the total compliance cost over two years at £300 million.
Shadow chancellor George Osborne said that many retailers were questioning the cost of implementing the VAT reduction and the impact it will have on the High Street when many shops are already offering 20% or 30% price reductions to lure in shoppers.
The Chancellor told the House of Commons the VAT reduction would "make goods and services cheaper and, by encouraging spending, will help stimulate growth".
The Treasury believes that shops will pass on the majority of the VAT reduction in lower prices, with customers splitting the extra cash between increased consumption and saving.
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