Many will remember the changes enacted by the then Chancellor, Alistair Darling, following the 2008 financial crisis when he temporarily reduced the standard-rate of VAT from 17.5 per cent to 15 per cent, then back to 17.5 per cent before increasing to 20 per cent in 2011. This is the rate at which it has remained since.
These yo-yoing rates spawned a heated debate over whether the changes to the standard-rate of UK VAT between 2008 and 2011 had the desired effect on consumer spending. Or did they merely add burdensome and complex VAT rate rules for businesses at a time when they wanted to concentrate on core business operations?
Faced with the need to kick-start the economy now, the current Chancellor Rishi Sunak could follow the example of his German counterpart. Germany recently announced that it will introduce a temporary reduction to its VAT rates as part of a coronavirus stimulus package.
Labour-intensive and consumer-delivered services, such as hairdressers, tradesmen, tourism offerings or restaurants, are often those hardest hit by high VAT rates as they do not have the same level of VAT incurred on expenses to recover and offset against VAT due to HMRC on income received. Unfortunately, it is these businesses that are also among some of the worst affected by the lockdown and social distancing requirements of coronavirus.
Prior to coronavirus, there had been sustained lobbying for the Treasury to apply a reduced rate of VAT, say 5 percent, to labour-intensive and consumer-delivered services. This, it was argued, would encourage consumer spending while enhancing job-retention and creation so generating wider economic benefits.
Would a reduction in the standard-rate of VAT or a reduced rate of VAT help these businesses now? Perhaps, but would they pass on any reduction in VAT to their consumers? Businesses would need to consider the commercial decision of either maintaining prices and increasing margins to boost profitability or reducing prices to encourage sales.
At a time where there already appears to be an enthusiasm and willingness from consumers to support local businesses, a reduction of VAT rates, while no doubt headline-grabbing, may not be necessary. Instead, could the VAT gathered from these businesses be ringfenced and invested by the Government in high street infrastructure or improved access and facilities for tourists? Would this not have a greater long-term positive affect on the businesses suffering as a result of coronavirus? We’ll have to wait and see what choices the Government makes in the months and years ahead.