Possible cut in VAT rate

There has been speculation over the weekend on the possibility of the Chancellor, Rishi Sunak, cutting the VAT rate in July to boost the economy. This may seem a bit of an oxymoron in that VAT is the second biggest income generator for the Treasury and a cut in VAT will decrease our revenue take, which, given the cost to the economy of the pandemic measures may seem detrimental.

Also, one has to question whether it will actually make a difference. Is the reason we are not spending money (in the pubs for example) is because of the prices? How many people, like me, will be straight into the pubs and restaurants once we are permitted (and they open)? A VAT rate change will not necessarily change this.

However, there is no doubt that some businesses could do with a boost and it may be that reducing the VAT rate will make a difference. But, can we actually change the VAT rate?

VAT is currently at 20% on most items (the standard rate). It is worth reminding ourselves that the UK is still currently bound by EU rules on VAT as we are still in a transitional period despite having technically left the EU. What does this mean for VAT rate changes?

• Technically the lowest rate a standard rate of VAT can be reduced to under EU law is 15%. There is precedent for this to happen as the rate was cut to 15% in 2008 to boost the economy, subsequently rising to 17.5% in 2010 and then the current rate of 20% in 2011.
• A lower standard rate only has a minimal impact on sales.
• The EU allows a lower rate for certain sectors. Some of these are already utilised in the UK both under normal rules (eg certain construction services are 5%) and also under derogated rules (eg books which are zero-rated) but there is scope, for example, to apply a reduced rate of VAT for the following sectors:
  • the provision of hotel accommodation or similar;
  • holiday accommodation and campsites;
  • restaurant and catering services (excluding drinks)
  • sporting events
• The UK has a reduced rate of 5% but the EU allows reduced rates of between 5% and 15% and most EU member states have generally higher than 5%. The UK could introduce a new higher reduced rate if it chose.
• A lower rate of VAT is likely to have a greater impact on sales.
• In either case, a VAT reduction will only have an impact on consumer take up if the cut is passed on to the consumer in full. Studies in respect of the changes in 2008 onwards suggest that not all suppliers passed on the effect of the VAT rate change to the consumer.

So, yes, whilst we remain part of the EU for VAT purposes, the UK can apply some changes to the VAT rate but it may be limited. Once we leave the EU completely we can effectively do what we want but, at the end of the day, the books need to be balanced and any change is only likely to be temporary.