Chris Sanger, EY’s Head of Tax Policy, comments on the predicted cut in VAT:
“With today’s announcement from the Prime Minister that social distancing rules will be eased from 4 July – meaning pubs, restaurants, hotels and hairdressers will be able to open their doors for the first time in nearly three months – all eyes now turn to the Chancellor.
“The Chancellor has demonstrated since the start of lockdown that he has been willing to use the levers at his disposal to support businesses through these unprecedented times. A cut in VAT would demonstrate that he is turning the dial from support to stimulus measures as the country begins its journey back to normality and the economy to recovery.
“There is speculation as to whether he will adopt the choice of Chancellors past and cut VAT will across the board, to include all products and services, or use what options are available to him whilst still constrained by the Withdrawal Agreement to target specific sectors, such as hospitality and leisure.
“Whichever option the Chancellor chooses, the tax policy that follows today’s announcement needs to support business and stimulate consumer spending, without burdening business with a more complicated tax system at a time when many are already struggling to keep their heads above water.
“With the economy running on empty, the Chancellor has the opportunity to put the tiger back in the UK’s tank and revitalise its economy.”
Jamie Ratcliffe, EY’s Head of Indirect Tax, comments on the practical implications of a VAT cut for business:
“During the global financial crisis in 2008 the VAT was reduced by 2.5 percentage points from 17.5% to 15%, at a cost to government of £12.5bn per annum, and resulted in a 1.2% increase in retail spending. This benefitted both customers and businesses, depending on how prices adjusted.
“A key challenge is how the measures are implemented in practice, particularly ensuring that the tax system is not made too complicated or expensive. In 2008, we saw businesses struggle with challenges around the timing of implementation. For example, retailers were not able to reprice their products overnight and systems changes can be time consuming and be costly.
“Beyond the broad based change, the Chancellor could target sectors that are specifically suffering under COVID-19 and would respond to a fiscal stimulus. Here, the Chancellor’s options remain constrained by the EU rules until the end of the year but, within those restrictions, the Chancellor could choose to apply a reduced rate (minimum of 5%) to specified sectors including hospitality and leisure, as already is in place in other EU countries.
“Either way, whatever option the Chancellor chooses, it will be important that it is delivered in a manner that the benefit to customers and businesses outweighs to cost of implementation.