The UK VAT Rate Reductions Of 2020 And How They Have Fared In The Start Of 2021

The trials and tribulations of 2020 extended beyond our personal capacities to overcome unprecedented challenges, impacting Indirect Tax significantly. As we all know, the UK’s VAT payment deferrals and rate reductions of 5 per cent for the hospitality, tourism, and leisure industries were implemented to relieve the financial pressures caused by the COVID-19 crisis. There were hopes that this easily and quickly implemented measure would stimulate consumer demand and offer a temporary boost to the UK economy at large – but were these hopes realised in actuality? We at Real Business have investigated, and this is what we know so far:

Effectiveness

Essentially, the idea of 2020’s VAT rate reductions was to give the public more financial leeway to spend their money by drawing their purchases in with promises of temporarily reduced prices for certain goods and services. However, these VAT rate reductions have produced questionable, mixed outcomes where the cuts are retained by the merchants, and the rises are passed onto the consumers. This was also seen in past VAT rate reductions. For example, the 2009 rate reduction from 19.6% to 5.5% for French restaurants was retained almost entirely by the restaurant owners. And after the Euro currency crisis in 2011, when the Irish tourism sector experienced a VAT rate cut from 13.5% to 9%, the cut was again retained by the providers.

Conditional Stimulus

As it stands in 2021, the UK is still experiencing supply restrictions due to continued social distancing measures in the face of the second wave of COVID-19 infections. When consumers are able to enjoy more leeway with regards to shopping and spending, how much stimulus will be necessary? We at Real Business have found that all depends on how effective this temporary VAT rate cut is as a potential stimulus. It would have had to meet certain criteria first, which, unfortunately, it hasn’t yet. The temporary VAT rate reduction in the UK would have been MOST effective as a stimulus at a time when:

  • Social distancing restrictions were consistently and steadily lifting and no longer hampering supply
  • Those enterprises directly affected by the 5 per cent reduction could cater to the added demand and could thereafter shift this cut onto their prices
  • Consumers are less scared and uncertain about the possibility of infection, encouraging them to engage and spend more
  • Demand remains low even in the event that the above conditions hold

As mentioned above, these conditions are yet to have been met. However, this does not mean that they won’t be in the near future. Furthermore, the fact that this VAT rate cut was preannounced proved to cause it’s own implications for business, depressing sales further. Many enterprises have complained of customers delaying their spending before the cut was enacted, waiting until prices lowered to purchase and transact. The timing of the expiration of this reduction is also questionable, as it should be planned to coincide with, or made conditional upon, the UK’s return to sustained and stable economic growth. However, with the second wave of COVID-19 infections well underway, there is no guarantee that vaccines will be effective nor that our economy will recover adequately in March 2021.

Timing

All of the above issues beg the question of whether the timing of these reductions was appropriate. What is painfully apparent is that the UK economy can only expect minimal stimulus from a VAT rate cut that was introduced when the supply of products was restricted and the uncertainty and fear around COVID-19 amongst consumers was high. What would have been the best course of action for our government would be a cautious one—a wait-and-see strategy—involving waiting until consumer spending recovers rapidly and fears of infection recede just as quickly. Once the state of these circumstances had been analysed, then the question of whether and how to implement the cut should have been grappled with back in 2020.

For more insights into the UK’s VAT rate, economic state, and business landscape, visit us at Real Business or sign-up for our weekly newsletter here!

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