Is a temporary VAT cut on the horizon?

Reports in the media indicate the government is considering a temporary cut in VAT in order to stimulate consumer demand. A lower VAT rate for the tourism sector — including pubs, restaurants and hotels — is one option being discussed.

A temporary VAT cut has the advantage that it is easy to implement quickly and can provide a short-term boost to the economy by giving people more money to spend and incentivising consumers to advance purchases to benefit from temporarily lower prices.

This could come as early as July as the government relaxes the two-metre social-distancing rule.

Pressure from business is growing. The FT reports that, Helen Dickinson, chief executive of the British Retail Consortium, said that cutting VAT and also income tax for low earners “would boost consumer demand and raise consumption”.

Any move to lower VAT would come at considerable cost to the exchequer but many close to the chancellor are of the opinion that the benefits to the economy of a temporary reduction in the 20 per cent rate might outweigh the costs.

The last VAT rate cut was back in 2008. It was introduced extremely quickly and caused significant implementation issues for all types of businesses. There are just a few things which businesses might want to consider in advance of a possible cut:

• If you find you are collecting less VAT from your customers as a result of a reduction in the VAT rate, this might have an adverse impact on cash flow and it will be important to model and monitor your cash flow position and plan accordingly.
• Can your software be easily adapted to set up new tax codes or will you need a software provider upgrade? It might be worth establishing now how quickly and easily this can be arranged.
• If in-house templates will need to be altered to allow a new VAT rate to be charged, do you have the resources needed to implement this.
• If you receive deposits – you can choose to use the lower rate for the entire sale if the sale takes place after the rate cut. This could be attractive to customers, encourage sales and improve cashflow.
• If you have finance agreements, where VAT on monthly payments is set out in advance, action will need to be taken with payments due within the VAT rate change period.
• What about items with price tags already attached – you could use stickers or a VAT ‘discount’ can be offered at the point of sale.
• The reduced rate of VAT may take you under the payment on account (POA) threshold of £2.3m or reduce the amount of the POA needed. It will be necessary to write to HMRC to request removal from POA or a reduction in POA payments.

At this stage, whether there will be a VAT cut and if there is, what sectors will be involved is speculation. The Chancellor is expected to make an economic statement around 9 July. We will of course keep you informed but if you need any advice get in touch, email enquiries@cowgills.co.uk.