The Government have launched a number of initiatives to prop up the economy in these difficult times. These have been well documented and include support for businesses, the self-employed and individuals. The most utilised initiative is the Job Retention Scheme, otherwise known as the Furlough Scheme. This provides support to 8.7 million people as of 31st May. Total claims amount to a staggering £17.5 billion from this one initiative alone. 6,300 large employers (classed as those with 250+ employees) have furloughed 2.5 million employments.
The Chancellor, Rishi Sunak is facing increasing pressure to provide additional tools that will stimulate the economy and consumer spending. One such avenue he is exploring is the reduction of Value Added Tax.
What is VAT?
VAT was introduced in 1973 and is a goods and services tax that adds to the cost of everything you buy in the UK. It is added on the price of a product or service at each stage of production, distribution or sale to the end consumer. The current rate of VAT in the UK is 20% for the vast majority of goods and services. It is charged at 5% for some health, energy and protective products and services. VAT is not chargeable on kid’s clothing, publishing and some health and building services.
It is the third-highest income stream for the Government and administered and collected by the HMRC. It is an indirect tax as tax is paid by the seller or the business, rather than individuals who ultimately bear the economic burden of the tax – i.e. the consumer.
Has VAT always been 20%?
When VAT replaced the Purchase Tax in 1973 it was 10%. This reduced to 8% between 1974 and 1978 and almost doubled to 15% in 1979. It gradually increased to 20% on 4th January 2011 and remains at 20% to this day. Alternative VAT rates have been introduced for the likes of luxury products of 25% and petrol 12.5%, although were later abolished.
In December 2008 Alistair Darling, then Labour Chancellor, reduced VAT from 17.5% to 15%. This was in response to the late-2000s recession and was intended to stimulate the economy. This was increased to 20% on 4th January 2011. The impact of the cut is inconclusive with conflicting evidence of the reduction achieving its aim of reducing prices. It is claimed only 20% of retailers when surveyed passed the savings on to consumers. Although shoppers canvassed at the time, a number of organisations said it had no impact on consumer expenditure. It was estimated to cost around £12 billion to the Government.
Will the UK cut VAT rates?
Germany has already announced plans to cut VAT rates from 19% to 16% on 1st July 2020. This will be in place till the end of 2020 at the earliest. It is expected the UK will follow suit.
According to various media reports, the Government are currently considering a reduction in the rate of VAT. Rumours have been circulating that a 3% reduction to 17% is being considered. Alistair Darling has called for a 5% reduction to 15%, the rate he instigated. It is expected any announcement could come in July.
This is intended to coincide with the further easing of lockdown restrictions that have been planned on 4th July. This follows on from the opening of the retail sector, with high streets open once again for business in June. According to the Times, the Government have advised the HMRC to consider options to reduce the Sales Tax. This is expected to include a reduction in the headline rate, plus also zero-rating more products for a fixed period of time.
It is widely considered Rishi Sunak will reduce VAT on some of the sectors hit hardest by the Coronavirus pandemic. This includes the tourism and hospitality sector – including pubs, restaurants and hotels. This would offer welcome relief as the 2-metre social distance rule is reduced to ‘1-metre plus’.
In April 2020 it has been reported UK VAT revenues were down 42% from £61 billion to £35 billion. This is a result of the closure of most retail businesses and the furloughing of 4 million people in April. Importantly too, it is a direct result of the VAT referral initiatives the Government launched to help support UK businesses.
Will a VAT Cut Save the Economy?
The aim of any VAT reduction is to reduce prices and give consumer spending the kick-start and impetus it needs. A cut to VAT would boost consumer spending in that some savings could be passed on to the end consumer. The Treasury would need to monitor the level of consumer spending to see if it encourage people to spend more, in particular in the retail sector. So whilst the VAT cut might not save the economy it will help sectors that are currently struggling as a result of COVID-19, albeit in the short-term. This would help pump money into the economy in times of uncertainty.
There are considerable risks associated with a VAT reduction. The cost to implement such a reduction would be billions of pounds – as evidenced by the last reduction in 2008. That money will ultimately need to be found elsewhere to plug the gap. There are also no guarantees that the savings will be passed on to the end consumer. Furthermore, it is also considered a short-term solution and may provide less funding for the Chancellor in the future. The consequence of this may result in future tax rises and lower public spending in the autumn budget.
VAT Deferral Scheme
It is widely considered that HMRC will extend the VAT Deferral Scheme until 2021. This will help ease the burden on many businesses who are experiencing cash flow problems. The added benefit of having to pay less VAT this year will also be welcomed. HMRC has also temporarily reduced.
For any questions on VAT and how this might impact your business, please don’t hesitate to contact us. You can contact us on 0800 471 4546 to arrange an appointment.