Chancellor Alistair Darling has called on retailers to pass on the 2.5% VAT reduction 'as soon as possible'.
Darling confirmed this afternoon that he would cut VAT to 15% effective from December 1.
VAT will remain at 15% for 13 months, when it will revert back to 17.5%. Darling said he expected to see the start of an economic recovery by the start of 2010.
Darling said: "We have handed back £12.5 billion to consumers and we would like retailers to pass that on as soon as they can."
Darling said that he had also created a £1 billion Small Business Finance Scheme to loan money to small and medium sized businesses experiencing cashflow difficulties.
British retail Consortium director general Stephen Robertson said: "This is a modest but welcome boost for hard-pressed households. It must be just one of a range of reviving measures including cuts in income tax and interest rates. Getting the economy up and running is vital and, in this fiercely competitive climate, our members will certainly be passing this on."
"Shops will cope, but implementing a new VAT rate in just a week will be exceptionally difficult for customers and retailers at their busiest time of year. IT system changes, replacing shelf labels and stickering-over prices on packs will be a mammoth and costly task. Staff will inevitably be diverted away from serving customers. Small retailers will find all this particularly difficult to accommodate."
Robertson added: "The Chancellor himself says we will still be in recession at the end of 2009. That may be economically and practically too soon to reverse this."
Separately John Dean, the chief executive of the British Shops and Stores Association, said: "Any cut in VAT is to be welcomed as a short term stimulus to high street spending, putting as it will around an additional £200 into people's pockets. Big ticket items such as furniture should feel the impact particularly, but it should not be forgotten that many household staples such as food, transport and children's clothing will not be affected. Retailers are unlikely to see any real turnaround whilst consumers feel vulnerable to redundancy and house prices continue to fall. The impact of both is likely to continue to be felt well into 2010."