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Retailers were working out yesterday how and when they will cut prices to take account of the chancellor's reduction in VAT - just as the governor of the Bank of England said the move was unlikely to provide a boost to spending.
Alistair Darling reduced the rate from 17.5% to 15% until January 2010 in the hope of prompting a pre-Christmas spree. But Mervyn King told MPs that it might not encourage spending until late next year, when the rate was about to go up again.
The government has not said how big a boost to spending it hopes for from the VAT cut - but the signs are it will be more of a blip than a boom. One leading retailer said yesterday that the small cut would have "almost zero impact" on sales.
Research by SPSL, which counts the number of shoppers on the high street, suggested last week's sales - which included 25% off at Debenhams and Marks & Spencer's one-day, 20%-off discount sale - boosted shopper numbers by just 4%. Another research group said the effect was very short-lived. By the weekend, the number of shoppers out spending was down 6% on 2007.
Yesterday store chains were calculating when the VAT reductions will take effect, how prices will be reduced and how to change millions of barcode readers, price tags and shelf-edge labels.
Many of the big retailers - including Tesco, Marks & Spencer, Dixons and Carphone Warehouse - are committed to passing on the cut in full by Monday.
But shoppers should not expect it to be passed on for every item. Stores are free to choose their own price levels and select them carefully. Most fashion stores will not want a £24.95 cardigan to be repriced at £24.51 and a £330 men's suit is unlikely to be reduced to £324.30.
Several retailers will use the cut to fund promotions on a limited range of goods that might lure in shoppers and tempt them to spend on other things too.
Matt Williams, the chief executive of Topps Tiles, said yesterday that the VAT cut would make "very little difference" to sales - which are down nearly 20% on last year's levels - and Topps would use the reduction to fund special offers at its 320 stores. "We won't have a blanket approach and change every price," he said. "That would be a logistical nightmare."
For online retailers, repricing is relatively straightforward - so it is likely to be worth shopping around online. Vacuum cleaner group Dyson, for instance, said it would pass the full 2.5% cut on to customers on its website from Friday, but it could take time before Dysons are cheaper in high street stores "because we need to work out the finer details with our retail customers".
Catalogue retailers face particular problems - because their prices cannot be easily altered. Argos - with 17,000 products in its catalogue - said it intended to pass on the VAT reduction in full, but that it "cannot guarantee that all necessary changes will be in place by the Monday deadline". Standard catalogue prices will be reduced at the tills, but special offers, such as games consoles sold with an array of games "will take some time to unwind".
Angela Eager, an analyst at IT research group Butlers, said cutting the VAT rate to 15% by Monday was a challenge even for the most agile businesses and some would not even try to make the required changes until after Christmas.
"It is not just a matter of repricing goods on the shelves and point of sale systems." Businesses, she said, would have to make, check and test changes on their stock and with suppliers - who will each make their VAT changes at different times - and at a very busy time of year. "Businesses usually have many months to prepare for budget-related changes, not just one week. This VAT drop is being introduced in the run-up to the Christmas shopping frenzy, a time when businesses need to concentrate on handling volume transactions rather than altering their systems." Eager warned that some retailers would wait "until next season's goods arrive".
The change could create cashflow problems among smaller firms. Many use the VAT they charge their customers to fund their businesses until they have to pay the VAT over to Revenue & Customs several months later. The VAT they had budgeted to receive will now be lower.
Matthew Hall, of the accountancy firm Wilkins Kennedy, said: "Companies know they shouldn't really be funding their operations by using taxes they owe as working capital, but a lot do it. For them it could cause a real cash crunch."
- Tax and spending
- Economic policy
- Retail industry
- Pre-budget report 2008
- High street retailers
- Consumer affairs
- Tax
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