A study by the Centre for Economics and Business Research (CEBR) claims that retail figures for the three months after the cut show it is having the desired effect.

The group reports that the temporary 2.5 per cent reduction on December 1st resulted in a £2.1 billion increase in retail turnover and calls for it to be extended for another six months.

Figures in the report reveal that annual growth in retail sales jumped from 1.6 per cent in November to 2.6 per cent in December and 3.2 per cent in January, before showing a slight decline to three per cent in February.

Douglas McWilliams, chief executive of the CEBR, adds: ‘The figures are clear; the VAT cut is working. The rise in retail growth is even more remarkable given the economic context over this period.’

However, a survey from the Federation of Small Businesses earlier this year claimed that 97 per cent of companies experienced ‘no impact on their trade at all’ following the cut.

In addition, the British Retail Consortium claims that it cost the sector around £90 million to make the changes last December, with a similar-sized bill due when the tax is returned to 17.5 per cent at the end of 2009.