Will the standard rate of VAT be cut?

There have been rumours that a fiscal statement to be published in July 2020 will include measures to stimulate the economy. One of the rumours relates to the possibility of a cut in the standard rate of VAT for a limited period.

A cut in the standard rate of VAT for a limited period of time may be introduced with a view to encouraging consumer spending, and stimulating the economy generally. Such a measure could benefit businesses throughout the supply chain. For example, manufacturers, haulage companies and retailers may all benefit if people decide to buy new goods to take advantage of a time-limited cut in the standard rate of VAT.

There is also the possibility that targeted measures in relation to VAT may be considered. For example, if the Government decided to apply the 5% rate of VAT rather than the standard rate of VAT to the catering and hospitality sector it may help many bars, restaurants, and hotels that have been particularly badly affected by the lockdown.

Looking to 2021 and beyond, will we see the application of the 0% rate of VAT, rather than VAT exemption, to financial services? Irrecoverable VAT is a significant cost to businesses such as banks and insurance companies. The 0% rate of VAT facilitates VAT recovery and if it was applied to financial services it may encourage many international banks and insurance companies, with geographically mobile and high earning employees, to increase the extent to which their operations are carried out in the UK. Before making such a significant change the Government can be expected to consider its potential impact on the wider UK economy.

For more information please contact Alex Millar, Senior VAT Consultant amillar@garbutt-elliott.co.uk