Third of stores did not bother to pass on December VAT cut

But retailers complain about having to bear the costs of its re-introduction

More than one-third of retailers did not pass on the cut in value added tax (VAT) last December, which pulled down the Government's standard measure of inflation by 0.5 per cent duriong that month.

According to the first analysis of the VAT cut's impact on the consumer prices index, 34 per cent of retailers ignored the reduction in VAT from 17.5 per cent to 15 per cent in December.

While 43 per cent of shops applied the price change at their tills and 14 per cent changed all prices marked on the shelves, 9 per cent used a combination of the strategies, a report by the Office for National Statistics (ONS) said.

The VAT cut has helped to put more money in shoppers' pockets during the downturn but it angered many retailers, who complained of the huge administrative burden and having less than a week to make changes.

The British Retail Consortium disputed the ONS's findings about shops not passing on the VAT cut. A spokesman said: "[Our] members made a huge effort to ensure the cut happened and we are not aware of any member who didn't pass the cut on to their customers, even at the start."

Retailers spent £90m altering their prices and systems, and the BRC said it would cost a similar sum to reverse the change by January next year, as the Government is planning. The ONS said the biggest impact from the tax cut was on prices in the recreation and culture sectors – equivalent to a 0.11 per cent decrease in the annual inflation rate – after entertainment and electricals retailers passed on the VAT cut for most televisions, radios, cameras, CDs and DVDs. Overall, the VAT reduction in December lowered that month's consumer prices index (CPI) from what would have been 3.54 per cent to 3.05 per cent, the ONS said.

However, retailers are urging the Government to delay reintroducing the 17.5 per cent rate of VAT on 1 January, claiming it could wreak havoc with Christmas trading and staffing levels over the holiday period.

Ian Cheshire, the chief executive of B&Q owner Kingfisher, said: "It's unfortunate timing and will contribute to the overall feeling of a not-very-cheerful January." He urged ministers to push the change back to a "more suitable" time at the end of January.

Terry Duddy, chief executive of Argos owner Home Retail, said: "This will impact retailers as well as customers and that cannot be good for anybody."