UK to cut VAT 2.5 in percentage,

To stimulate consumer spending and give retail a chance in the coming year, the British government has implemented a temporary cut to the value-added tax (VAT)—the equivalent of a national sales tax (because it gets passed along to consumers)—reports Alibaba.com.
The VAT will go down to 15% from its previous 17.5% rate for a period of 13 months, starting Dec. 1, UK Chancellor of the Exchequer Alistair Darling presented during his pre-budget statement.
Major retailers have already expressed gratitude for the cut. “This is good news for consumers and will help to maintain consumer confidence and spending, which is a good thing not just for individuals but also for the economy,” said the CEO of Tesco, the biggest UK retailer in terms of sales.
Companies are urged to pass down the VAT reduction to customers immediately. Many have already offered price discounts of 20-25% to stimulate sales in order to dilute the impact of the cut.
But analysts are skeptical: The VAT will go back up again on Jan. 1, 2010, which is right in the middle of the post-Christmas sales. It may therefore end up as a “retail profit tax” because retailers will have trouble passing the increase on to their customers, observes Pali International’s Nick Bubb.
Ultimately, the cost of the cut (£12.5 billion a year) will be paid by consumers via increased taxes on alcohol, tobacco, and petrol, analysts said.
There is also concern that the modest reduction would not be noticed by shoppers. The average earner, with an annual salary of £25,000, would save only about £170 a year because many food items do not attract VAT and the change may be too small to influence big-ticket purchases, writes Retail Week.
A £550 flatscreen TV, for example, would go down only to £538.38; a supermarket shopping basket would go from £50 to £49.47.
Retail stores will also have to bear the cost of changing the VAT in just one week, said British Retail Consortium director general Stephen Robertson. It’s the busiest time of year, so changing the IT system, replace shelf labels, and stickering over prices will be a “mammoth and costly task,” he warned.