Crystal Ball at the Ready – Planning for a VAT Rate Change

There is an increasing level of chatter on the airwaves about the potential for the Chancellor to either reduce the Standard VAT rate from its current 20% level and/or look at introducing some  Reduced VAT rates to support specific sectors of the economy – most notably that of tourism and hospitality.

We have already seen the bringing forward of the zero rate on e-publications here in the UK from December to the 1^st May 2020 but it should be noted that other VAT reliefs brought in – notably the Zero rating of sales of PPE equipment - have a specific time period of application. A range of options exist, therefore.

The UK would not be alone in taking this route for economic stimulation as there are a number of examples of similar action from across the EU – Germany, Greece, Belgium and Austria to name a few, where sectors such as hospitality and catering areas are to benefit from lower VAT rates for specific time periods.

Reducing the UK Standard VAT rate is a lever that previous Chancellors have used. Alistair Darling, dealing with the global recession in 2008 stated that the “best and fairest approach” to delivering the major part of the government’s economic stimulus was a temporary cut in the standard rate of VAT from 17½% to 15%,  effective between 1 December 2008 to 31 December 2009. The suggested cost of such a reduction being £12.4 billion.  The 1^st January 2010 saw the rate return to 17.5% and from 4^th January 2011 the Standard VAT rate has been set at 20% (G Osbourne being the Chancellor at that point).

Value Added Tax Receipts have increased over the last five years from

2014-15 - £113.9bn

2015-16 - £116.0bn

2016-17 - £124.4bn

2017-18 - £128.6bn

2018 -19 - £135.6bn

Therefore, it is a significant contributor to UK Tax receipts overall (the 2^nd biggest). The economists must return to the cost/benefit analysis of any decision to cut or not to cut. That will be cost in every sense of the word not just monetary.

The question to address is the validity of an immediate beneficial impact on the economy. The Institute of Fiscal Studies paper published on the 26^th June – this week – highlights a number of aspects that the Chancellor will no doubt be considering.

“A temporary VAT cut would be most effective as a stimulus: i) when we are confident social distancing measures will continue to be eased and that these measures are no longer limiting supply; ii) when firms that would be affected by the cut are able to accommodate additional demand and are likely to respond by passing a VAT cut onto prices; iii) when uncertainty and fear of the virus is lower so that consumers would be willing to increase spending; iv) if demand is still low even when these other conditions hold.”

These conditions, particularly at a practical level of shoppers’ confidence around social distancing and businesses ability to maintain social distancing within the working environment, would seem key as we review the news in this week.

Equally, the danger in a Chancellor signposting a VAT rate cut too far ahead may lead to purchases being delayed awaiting that cut and further depressing the markets.

At a practical level, a VAT registered organisation will have the challenge of implementing any VAT rate changes at a time when accounts and finance teams are, like many, working remotely. Managing supplies that span a VAT Rate change are an issue but simply the practical coding of VAT flags within income systems, calculations on sales invoices and cash management through tills and vending areas, reviewing contracts, all need to be on the “to-do” list should a change in VAT rate or treatment arise.

Nothing impossible, of course, but another VAT issue to manage for teams dealing with the cashflow concerns arising generally from the COVID crisis, getting ready for the VAT changes that Brexit will bring, rolling out implementation of Making VAT Digital (the 2^nd stage of implementation pushed back to April 2021 luckily) and the day jobs.

Instinctively, it feels that a VAT rate change is coming – a return to 17.5% may be a sensible step as systems will have old codes still in place to handle that rate. Plus a temporary reduced rate for the tourism and hospitality sector which would encourage staycations and – on the assumption that any VAT rate cut is recognised in prices – be some financial relief to those concerned over long term employment prospects on household budgets.

Crystal ball gazing you say – probably – but it does feel like an economic lever waiting to be pressed.

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