Emergency VAT cut in the offing to turbocharge the economy

Chancellor Rishi Sunak is mulling over the prospect of an emergency VAT cut, with a reduction in the sales tax thought to be an effective way of mitigating part of the economic fallout from the coronavirus lockdown.

Officials within HM Treasury and HM Revenue and Customs (HMRC) are reported to have been asked to draw up proposals for easing the sales tax, as well as other innovative tax moves to stimulate consumer demand and encourage recruitment.

VAT was slashed during the last global recession of 2008. The then Labour Chancellor, Alistair Darling, opted to cut it from 17.5% to 15% for just over a year.

Since January 2011, VAT has been set at 20%, but the latest emergency VAT cut could see it fall to 17% for the coming months.

Former Chancellor, Sajid Javid, believes such a cut would help to “turbocharge growth” across the UK.

Mr Javid said the “one-off fiscal hit” of approximately £21bn would not only “give consumers more bang for their buck” but offer a “vital tool for ensuring businesses can weather the storm and retain staff”.

The cut would likely be a welcome boost to small, local retailers, enticing consumers to ramp up their spending. Many of whom received a boost for the first two days after the reopening of non-essential stores but subsequently witnessed revenues plummet to just 40% of normal levels ever since.

Zero-rating an increased number of consumer goods for a brief timeframe could certainly be one way of encouraging shoppers.

It has also been reported that the Treasury is looking at new measures to protect small businesses and create new employment opportunities.

First and foremost, plans are afoot to extend the deferral of VAT payments by businesses for an additional three months.

Business rate relief may also be extended, as the Treasury seeks to ease the financial burden on small firms impacted by COVID-19 through no fault of their own.

Employer’s national insurance could also be cut to incentivise business owners to retain more staff, while an employer’s national insurance holiday for all new employees could also foster new recruitment drives in the months ahead.

Senior Whitehall officials have said that several measures are “on the table” to Sunak in the coming weeks but stressed that no final decision has yet been taken. Britain’s small business community will know more when the Chancellor gives his next statement to MPs in the week commencing 6th July.

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Date published 25 Jun 2020 | Last updated 25 Jun 2020