Rumour Mill Friday – UK VAT Rate Cut

by Berthold Bauer on June 19, 2020

Following Germany’s decision to reduce VAT from 19% to 16% in order to boost consumer spending and Rishi Sunak’s contemplation of a similar action here in the UK, what are the chances and the pundit’s opinions?

The “For’s”

  • On face value a reduction in VAT can be a tool to boost consumer spending;
  • It is often seen as a benefit to lower income households; and
  • It can be instigated swiftly and for a [short] defined period

The “Against’s”

  • In reality a rate reduction triggers consumers to either defer spending to take advantage of an imminent reduction, or bring forward spending to maximise a VAT reduction window; and
  • Therefore ‘losing’ VAT on transactions that would occur anyway is not beneficial to tax revenue generation – ‘squandered’ is perhaps a word to consider

The Facts

Putting aside the nuances of Brexit, VAT is here to stay for the foreseeable future and the minimum Standard Rate permitted is 15% – so it cannot be reduced lower than that.

There is the ability to apply the 5% rate perhaps to hard-hit industries such as pubs and restaurants – we can already see this on overseas jaunts – what are they? 10% in Spanish and French restaurants for example.

If such a reduction is proposed it will be sprung upon us with little or no advance notice (to prevent the above profiteering) and Traders will need to react swiftly.

That said the Time of Supply rules will mean VAT is due at the rate in force when either

  • The invoice was raised; or
  • Payment was received

So largely insulating them from pleas and whinges from customers and simplifying Construction contracts where stage payments are made – it will be necessary however to undertake a valuation at the time the rate changes.

Let’s see…

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