It’s good that the shops are beginning to open and we’re getting some sense of “normality” back into our lives.  To say that it will be a long road back is an understatement.  And, of course, every commentator seems to have their own ideas about how the government can help.  I am definitely NOT an economist, so have very little, if any, understanding of the big picture “macro-economics” that applies

One of the most common suggestions is that the government should reduce the VAT rate.  Chancellors have done this at times over the years, most recently in 2016 when the economy was going through a particularly low period. I am definitely NOT an economist, so have very little, if any, understanding of the big picture “macro-economics” of how our economic system works.  I’m looking at it from the other side of the coin: the implications for small and medium sized businesses and whether it has any real effect for us as consumers.

Mr Osborne reduced the standard VAT rate by 2.5%.  But it didn’t  have any significant effect and I’m not convinced it would help those who need the help the most; i.e. the small business community.

So why is that?  The function of VAT as a tax is to essentially to collect VAT on sales, with the ultimate final consumer – i.e. you and I as individuals – paying 20% on our sales.  So think about it this way.  Suppose you need to get your hair cut (don’t we all at the moment?).

  • Your usual stylist charges £30 including VAT.  At 20% VAT, the VAT included is 20/120 x 30 = £5.
  • The VAT exclusive charge remains the same at £25.
  • The chancellor reduces the VAT rate to 15%; i.e. £25 x 15% = £3.75.
  • VAT inclusive price at 15% VAT = £25 + £3.75 = £28.75.

To quote a big supermarket, “every little helps” but it’s very unlikely that the difference of £1.25 would be enough to change anybody’s decision about whether to have a hair cut this week or next week.

What if a retailer doesn’t reduce prices?

Of course if you’re a retailer, you may simply decide to NOT pass on the benefit to your customers.  Think about your typical sandwich shop, selling coke or other fizzy drinks that are liable to VAT.  The selling price of each can is £1, including 20% VAT.  The VAT amount is therefore £1 x 20/120 = £16.67.

I noticed that Amazon were charging 83p instead of 99p for certain electronic books for a few weeks.  Not surprisingly, this seems to have fallen by the wayside more recently…….

But that is for fairly low value goods/services. I suppose that if you’re buying a new car for £30k list price, then reducing the VAT rate to 15% would mean a saving of £1,250.  Definitely worth having.

I can’t help thinking that any reduction in VAT would benefit larger retailers, especially if they don’t pass on the reduction, not the customers.  Probably the same retailers who would promptly increase selling prices if the VAT rate goes up.

I’m sure that the governments’ advisors and economists can provide much more sophisticated information to show the effect to the UK Treasury of a VAT rate cut.  But the simple point is that I doubt that any reduction in the VAT rate will have much effect for the consumers or small businesses.


July, 2020

PS Coming soon: Webinar: VAT for residential property developers and contractors.  Keep an eye out for more information…..

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