During his pre-Budget report speech, Darling said this would encourage consumers to continue spending and stimulate growth in the economy.
He said: “After 13 months VAT will return to 17.5 per cent, by which time I expect the recovery to be well underway.”
The Chancellor also confirmed that income tax will rise to 45 per cent for incomes over £150,000 from April 2011.
City IFA The Route head of research Simon Pimblett says the VAT cut will not make a real difference to the flailing economy.
He says: “It does after all only equate to a 2.13 per cent reduction in shop prices and many of the essentials of life are zero rated or 5 per cent rated anyway. The VAT reduction applies to discretionary products, which are likely to remain discretionary.
“It is unlikely that a buyer is likely to be tempted into a £100 purchase by a discount of £2.13 – especially when many of the main stores have been trying to stimulate buyers with sales of up to 20 per cent in recent weeks.
“On the other hand, where relatively big savings are to be made, such as on a £20,000 car, is the £400 saving likely to convince a customer uncertain about committing their money in this economic climate?”
KPMG UK indirect tax partner Gary Harley says the proposals look good for the consumer and certain organisations, but overall business will carry much of the burden of the change in rates.
He says: “For businesses generally, they will have to bear two sets of systems changes, when the rate goes down and then returns to 17.5 per cent in January 2010. These changes are expensive, time consuming and are coming at most businesses busiest time of year.”