Is proposed VAT rate cut a good idea?

Sunak apparently considering cutting standard rate of VAT

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The FT has floated this idea yesterday, but Richard Asquith had already considered whether the UK should follow Germany with its temporary VAT rate cut from 1 July to 31 December 2020.

Will Sunak cut the standard rate of VAT with little warning? We are expecting some sort of mini-Budget in July, but businesses would need more than a few days notice of a cross-the-board VAT rate cut.

Would it actually help stimulate demand or would businesses not pass on the savings to customers?

Is it better to have a targetted VAT rate cut for the hospitality industry as Richard suggested. What do your clients want?

Replies (27)

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By Justin Bryant
24th Jun 2020 15:33

It's a very good way to delay all VATable expenditure until July 2020. There are of course also rumours of adverse changes e.g.
https://www.irwinmitchell.com/news-and-insights/newsandmedia/2020/may/in...

The IHT BPR trust banking planning could be done as a rescindable contract sale at undervalue for £1 (if CGT MV uplift on death goes that is then not a downside of the planning).

https://www.step.org/news/fiscal-measures-planned-promote-uk-covid-19-re...

You can see here that tax receipts for May 2020 have basically halved.

https://www.gov.uk/government/statistics/hmrc-tax-and-nics-receipts-for-...

https://www.independent.co.uk/news/uk/home-news/vat-cut-uk-economy-rishi...

Some VAT rate change tips are here: https://www.macintyrehudson.co.uk/publications/article/preparing-for-a-v...

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By Gone Sailing
22nd Jun 2020 11:27

HMG needs to have money in people's pockets, then let people prioritise where they spend it. This is the argument for reduced Income Tax.

VAT is often (I say with caution) a tax which people choose to pay, and also taxes, so some extent, untaxed income.
Reducing VAT is a very bad idea.

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By ireallyshouldknowthisbut
22nd Jun 2020 11:44

Its another case of "simple announcement for Rushi, massive amount of work for everyone else"

Bang goes any through of a taking things a bit easier in July if its changed.

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paddle steamer
By DJKL
22nd Jun 2020 11:48

Not sure the retail price of items is the factor likely to curtail demand, one either goes out for a pint/meal etc or does not, to me it is more policies re public safety re Covid that will drive up demand.

There appear to be a number of recent (ish)market research surveys indicating one of the most significant current concerns is safety on public transport and whilst that prevails high streets are short on trade plus hospitality will suffer, if people will not travel in they will not shop.

If I were Chancellor I would be considering subsidies for transport providers, free buses/trains may do more good that cheaper dresses and shoes.

To paraphrase Mr Costner, transport them and they will come

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Replying to DJKL:
RLI
By lionofludesch
22nd Jun 2020 23:19

DJKL wrote:

Not sure the retail price of items is the factor likely to curtail demand, one either goes out for a pint/meal etc or does not, to me it is more policies re public safety re Covid that will drive up demand.

There appear to be a number of recent (ish)market research surveys indicating one of the most significant current concerns is safety on public transport and whilst that prevails high streets are short on trade plus hospitality will suffer, if people will not travel in they will not shop.

If I were Chancellor I would be considering subsidies for transport providers, free buses/trains may do more good that cheaper dresses and shoes.

To paraphrase Mr Costner, transport them and they will come

Hmmm - more people travelling 300 miles to Barnard Castle.

Is that good?

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Replying to lionofludesch:
paddle steamer
By DJKL
24th Jun 2020 10:20

If you cannot get people out and about spending you can kiss goodbye to the UK economy, us all the shopping online will not generate anything like the same GDP and the leisure service industries are a great means of accelerating the speed of money in the economy.

Give bus/rail companies money so they can put on more frequent services, put in place safety measures on the trains/buses, subsidise /make fares free, because if the great British Public does not go out and spend the great British service led economy will collapse.

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Replying to DJKL:
RLI
By lionofludesch
24th Jun 2020 10:32

DJKL wrote:

If you cannot get people out and about spending you can kiss goodbye to the UK economy, us all the shopping online will not generate anything like the same GDP and the leisure service industries are a great means of accelerating the speed of money in the economy.

Shop local.

Not in Barnard Castle.

Unless you're from Barnard Castle, obviously.

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By SXGuy
22nd Jun 2020 11:50

I cant see any client of mine reducing their fees, if anything they will probably make up the vat difference, which would probably be a welcome increase for them.

Perhaps big retailers may reduce their prices inline with the vat, but its really only going to help the high street consumer in my opinion.

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By Anonymous.
22nd Jun 2020 12:00

The BBC Business Editor, Simon Jack, said:

"I'm not sure people's reluctance to spend is because things are 5% too expensive. Must be a question over how effective a VAT cut of 5% would be? 2008-2009, 2.5% VAT cut for 1 year raised spending by 1% when shops and hospitality were operating normally."

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the sea otter
By memyself-eye
22nd Jun 2020 13:36

He would be better advised (I am available) to make the cost and hassle of employing people less onerous - no one is going to say "Whooppee do" because VAT is down to 17/15%, if they have no job.

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Replying to memyself-eye:
paddle steamer
By DJKL
22nd Jun 2020 13:57

Paying to assist employment costs/issues whilst not stimulating demand is imho a recipe for the jobs to eventually go anyway if the demand does not come back.

High Street Retail plus hospitality/leisure are to my mind the sectors taking/going to take a hammering, something pointed there is the way to go.

Reliefs re costs are fine as a stopgap but they do not address the question, how do we get customers back to shopping centres/city centres, and for some places how on earth do we get some tourists?

To me vat is too blunt/crude an instrument, wage subsidies just buy time but cure nothing, if trade does not naturally get better are you forced to keep the subsidy forever?

What retail needs is footfall, what leisure needs is footfall, generate footfall and you lessen the slaughter of the retail/hospitality city centres, if you cannot encourage consumers back, especially as office workers may work work more from home not their offices, then a very large percentage of these types of business, the sandwich shops, the newsagents in the office districts, barbers, beauty, all these that feed on the office workers etc will also fail, secondary as well as prime is currently all on the line.

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Replying to DJKL:
By ireallyshouldknowthisbut
22nd Jun 2020 14:20

The only way you get footfall is to stop the ruddy virus.

Which is not going to happen by opening shops & pubs too early, and telling people they can stand closer together. its like telling someone with a sprained ankle to go for a run. It *might* get better, but its more likely to prolong the agony.

I love going to the pub. There is no way I am going to the pub at the moment, regardless of what Boris says. I am not putting my mouth on the glass the barman has just touched. It ain't happening!

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Replying to ireallyshouldknowthisbut:
the sea otter
By memyself-eye
22nd Jun 2020 16:28

I, on the other hand would be down at the pub now, if it were open. But there again I don't scare easily

except for spiders, of course....and the mother in law.

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Replying to memyself-eye:
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By Gone Sailing
22nd Jun 2020 16:33

fear is one thing, logic is quite different.

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Replying to Gone Sailing:
the sea otter
By memyself-eye
22nd Jun 2020 17:27

Ahh, the logic that says 'let's bankrupt the economy' for a pandemic (scary word that, designed to, as Lord Palmerston said, to "upset ladies at their afternoon tea") that passes 99.9% of people by.

The true logic will be the cost after all this is over.

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Replying to memyself-eye:
RLI
By lionofludesch
22nd Jun 2020 23:24

memyself-eye wrote:

Ahh, the logic that says 'let's bankrupt the economy' for a pandemic ....

Borrowing is about half of what it was at the end of the war. We just took 60 years to pay off the debt. We didn't go bankrupt.

Currently we're borrowing about 30-35% more than normal.

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blue sheep
By NH
22nd Jun 2020 13:59

NO, absolutely not, they tried this in France with the hospitality industry a few years ago, all that happened was that the bars and restaurants kept prices the same and pocketed the difference - surprise surprise a couple of years later the French tax reversed the rate back again.

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Replying to NH:
RLI
By lionofludesch
22nd Jun 2020 23:29

People laugh at me when I say that VAT is a tax on retailers yet I see nothing to suggest the contrary.

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By sbrstepshep
22nd Jun 2020 16:56

Make it even simpler - do away with VAT entirely!

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Replying to sbrstepshep:
paddle steamer
By DJKL
22nd Jun 2020 17:12

But if all the public do is say spend more online on goods with this windfall, because vat is in the main only a tax on the end consumer, then the money in large part works its way out of the UK economy (as consumer goods are in large part made abroad) with little stimulus to the UK economy. You need money to free circulate withinour economy, from bar to brewery, to staff wages, to rates etc, the multiplier effect is far greater if we give the public more cash and encourage them them out on their hind legs to spend it here.

The wall of cash leaving the UK economy will also put pressure on sterling , increase import costs to gain some eventual equilibrium, in the meantime unemployment rises, social spending increases etc.

Vat and other taxes are crude levers to target economy activity, interest rates are now spent with really nowhere to go, what is needed is far more targeted incentives to spend in the UK and for that you need to push activity towards sectors where the marginal propensity to import is lower- right now the leisure sector.

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Replying to DJKL:
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By Gone Sailing
22nd Jun 2020 17:31

Then "buy British" is key, which was not allowed under EU rules.
I wasn't a leaver, but now there is some lining, not sure how silver it is.

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Replying to Gone Sailing:
paddle steamer
By DJKL
22nd Jun 2020 20:25

Not buy British really, but certainly trying to spin any"injected funds" as much as possible around the UK economy seems sensible given the position everyone in the world is likely to be in and us especially post 31/12/20.

When the Covid direct support measures run out of steam this year we are going into real economic meltdown, couple with a limp into WTO re good sold into the EU plus the other trade in goods agreements via the EU ceasing at the same time plus curtailment of our into the EU service supplies post 31/12/20, and it is a perfect storm.

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By Paul Crowley
22nd Jun 2020 17:25

Thanks Rebecca
A nice little pile of work to add to accountants, but then we seem to have so much spare time now.

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By petersaxton
22nd Jun 2020 21:11

Reducing income tax is the only way to be certain to get money into people's pockets.

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By petestar1969
24th Jun 2020 10:00

They should scrap all VAT between VAT-registered businesses, just make it a B2C tax.

The rate should also be permanently reduced to 10%.

Make me the Chancellor now!! :)

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Replying to petestar1969:
RLI
By lionofludesch
24th Jun 2020 10:37

God forbid !

Think I want to get - and verify - VAT registration numbers from all my customers so that I know whether to charge VAT or not ?

Reverse charges for everyone ? Or, at the very least, for the partially exempt ?

Not to mention - how, exactly, would that help ? It's just a cash flow issue.

I've seen some half-baked schemes from the Government in my time - notably the 2001/03 Child Tax Credit - but even they haven't had one that poorly thought through.

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Phil Nickson
By Philip Nickson
24th Jun 2020 14:44

Most small pubs pay more to the VATman than they make in annual profit and many publicans are on tax credits. Coronavirus, and the continued social distancing rules will mean many pubs and small restaurants cannot be operated profitably. Therefore a reduction in VAT to that applicable in Spain or France for the hospitality industry or what Germany has just woken up to can only help this sector. It remains daft that a pork pie in a pub costs 20% more than one from a supermarket.

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