Shoppers set to be granted VAT reprieve - for now

Shoppers have been granted a brief reprieve from tomorrow's VAT hike as stores temporarily absorb the increase in a bid to remain competitive.

The VAT rate in England will be going back up to 17.5pc on New Year's Day after being reduced to 15pc last December as part of an emergency government plan to stimulate consumer spending and boost the economy, saving the average person around �170 a year.

But according to the British Retail Consortium (BRC), re-pricing items in line with the 15pc VAT rate cost retailers close to �90m in lost revenue, and the cut had a 'very limited effect' in terms of helping retailers.

Savings to shoppers have varied depending on the value of the goods they have bought, with people buying more expensive items such as cars benefitting the most from the reduction in tax.

The majority of the larger Norfolk-based stores, including Bakers and Larners, Palmers, Roys, John Lewis Norwich, Goddards and Jarrold, have decided to absorb the VAT increase initially and not increase the majority of their prices until they have sold their existing stock and have to buy more in at the higher VAT rate.

Most said this was so they could remain competitive and to avoid the difficult task of repricing every item at a busy time.

Some of the larger chain stores such as Topshop, Tesco, Asda and Argos also plan not to pass the price increase on to their customers immediately, but others, such as Marks and Spencer plan to increase their prices on January 1.

Robert Hallam, managing director of John Lewis Norwich, said: 'Retailers realise it is a competitive market and if they don't price their products competitively, customers are likely to shop elsewhere.'

Caroline Williams, chief executive of the Norfolk Chamber of Commerce, said that retailers in the county would be making the majority of their decisions about whether to add the extra VAT to prices based on the existing price of the item. For example, items costing �14.99 would not be put up to �15.32.

She said the chamber would have liked to have seen the 15pc VAT rate retained and will lobby the government to ensure there are no further VAT increases on consumer goods.

Peter Mitchell, managing director of Jarrold, said: 'It makes no sense to put prices up in January as it is a time when retailers need to work hard to encourage their customers to stay loyal and keep shopping. It will mean that our margins are squeezed, but we accept we need to tighten our belts in this way.'

Some of the smaller shops in the city are also preparing to try and absorb the increase, although may suffer more than the larger shops as a result. Roger Pemberton, chair of the Norwich Lanes Traders' Association, said: 'The change is an administrative burden to the independent shops in the area, and although it has been a good trading time for them in the run-up to Christmas, many of them are nervous about what 2010 will bring.

'Whether they pass the cost onto the customer or try to absorb it will depend on the store, but it will mean the erosion of profit margins.'

According to a poll by the BBC programme Money Box, almost one-third of respondents said their spending would decrease after the VAT rate was increased.

However, although the majority of shoppers in Norwich said they would like to see the 15pc rate continued, most did not feel the increase to 17.5pc would affect their shopping habits.

Radio producer Martin Bruce, 30, from Upton, said: 'The lower rate has been a nice bonus but I don't think it has made me buy any more. It has been good for people who wanted to buy things like cars, but I've only bought smaller things.'

Yarmouth housewife Jackie Roberts, 59, added: 'I think it will make a bit of difference to everybody because money can only go so far, but I haven't really been rushing around trying to buy things before the extra tax is added on myself.'

The RAC has also warned that motorists are likely to be hit by the rise, which will add an extra 2.3p to the average price of petrol, taking it to �1.10 per litre.