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Summary
- Value added tax or VAT rate cut has been a major tool deployed by many countries to help businesses to wade through the pandemic induced difficult conditions.
- In the UK, the government had announced a VAT rate cut to 5% for the hospitality and tourism industries.
- Since that rate cut was announced, several other industries have also demanded a VAT rate cut to help them in the recovery process.
The UK government had reduced Value Added Tax on hospitality services from the current 20% standard rate to the reduced rate of 5% on 8 July and then further extended the period from 13 January until 31 March in a bid to save the sector from further losses and disruptions.
The pandemic’s impact on the UK economy is no hidden secret as it has sent tremors across many sectors. After the announcement of the VAT rate cut, several other industries had also demanded similar breathers citing their very slow rate of recovery after the first lockdown was lifted. The second lockdown and its adverse impact on other industries have renewed the demand for the extension of the VAT rate cut scheme.
Value Added Tax (VAT) is a form of indirect taxation that is levied on each stage of the sales and distribution process right from the producer to the end consumer. By its very structure, it impacts all businesses, which are charged with different rates as deemed appropriate by the government. After the pandemic had hit, the UK government found it convenient to change the VAT rates in order to bring down the operating costs and the final prices of goods.
VAT rate cut and hospitality, tourism sectors
The UK government had lowered the VAT rates from 20 per cent to 5 per cent for the hospitality and tourism industries, which will remain in place till 31 March. 2020. The rate cut has not only helped these industries to survive but has also helped them to bring back thousands of their employees from furlough and restricted the unemployment rate in the country to spiral down further.
The hospitality and tourism sectors, which are the two largest employers for semi-skilled and unskilled people, are major contributors to the tax revenues in the country. Lowering the VAT rates temporarily helped the government revive a large section of its tax base while simultaneously reducing its expenditure on other employment support stimulus measures.
In a weak market, a lower VAT rate leads to a higher number of transactions ensuring a higher accrual of the total tax collected. Thus, the VAT rate cut for the hospitality and tourism industry has not only helped them to increase the number of transactions and increase their pace of recovery but has also helped the government to bring in more revenue.
VAT rate cut extension
There are several other industries that will also be benefited by a VAT rate cut, similar to one extended to the hospitality and tourism sector. Manufacturing industries and sectors which employ a significant amount of labour could be the ones which would be able to take advantage of the VAT rate cut. Besides, the traditional retailing sector would also benefit if a VAT rate cut is extended. However, goods retailed via online websites should be kept out of its purview.
The automobile sector will benefit a lot from a VAT rate cut. The industry is a large exporter and any tax benefit extended will lead to a significant jump in the country’s exports and foreign revenue income.
However, the industry where the government should extend a VAT rate cut on a priority basis is the manufacture and sale of renewable energy equipment. When the government has launched massive carbon emission reduction programmes while pledging and earmarking billions of pounds towards that objective, it does not make sense that a VAT should be collected from this industry.
Currently, the VAT rates on the sale of renewable energy equipment in the UK is governed by the European Union (EU) VAT rules. It is imperative that when the EU common economic area regulations in the country are withdrawn on 31 December, no new taxes are imposed on this sector by the British Exchequer.
Larger economic impact
Considering the economy as a whole, a VAT rate cut will benefit the British Economy on two major fronts. First of all, it will accelerate the recovery rate of most industries who are struggling since the opening of the first lockdown. The second lockdown would be in helping to check the downward slide of the unemployment rate.
Both these aspects are critical to the early recovery of the whole economy, and utilisation of the full potential of the VAT rate cut measure would not only benefit the industries but also bring in incremental revenues to the government coffers.
Second lockdown and No-deal Brexit
The second lockdown and the withdrawal of the European Union Common Economic Area Regulation from the UK on 31 December are major events that could have a telling effect on the economy. The VAT rate cut can be a major tool the government can use to alleviate much of the pain that businesses in the country are currently reeling under.
