Chancellor’s VAT cut offers a short-term bonus.
The Chancellor has announced a targeted reduced rate of VAT will be introduced from Wednesday 15 July, aimed at some of the sectors hardest hit by COVID-19 - hospitality and tourism. The 15% cut will cover food and non-alcoholic drinks from restaurants, pubs, bars, cafés, and admission to attractions across the UK.
Melissa Geiger, head of international tax and tax policy at KPMG in the UK, comments:
“Consumers and businesses in the hospitality and tourism sectors will welcome this move, as the UK follows a number of EU Member States who have introduced similar reduced rates in these sectors.
“The VAT cut promises short-term relief for businesses disrupted from Coronavirus. But while consumers will hope the change will be passed on in lower prices, businesses could instead use the cut to hike prices to improve their margins. We suspect the answer will be somewhere in between.
“Extending the rate cut until 12 January 2021 is a good move, meaning the sectors – and consumers – can maximise Christmas and New Year spend at the reduced rate.
“Logistically, however, there isn’t a lot of time to amend systems, tills, and pricing. As we have seen with previous VAT rate changes, it can create accounting issues, especially when different rates of VAT apply in the same VAT period. Businesses need to pay particular attention now to the transition rules, as they are likely to have already charged VAT at 20% for forthcoming bookings and stays. Changes occurring mid-month at the beginning and end of the scheme will make preparing VAT returns extra hard for those businesses.
“We’ve had plenty of treats now but a bit like our Christmas dinner, it can take a while to burn off the excess calories. We all know how hard that can be. The current support measures will need to be paid for. Going forward the Chancellor will have to deliver a balancing act between investment in the economy and managing national debt levels. While the Prime Minister has made it clear the Government is keen to avoid hiking taxes, the autumn Budget should give us a clearer indication of whether this is possible.”
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