Budget 2020 and beyond – what is the future for VAT?

Glyn Edwards

by Glyn Edwards, VAT director, MHA MacIntyre Hudson

One of the arguments made in favour of leaving the EU was the freedom that it would give the UK to set our own VAT rates.

The background to this is that VAT is essentially a European tax which requires member states to abide by EU directives. Those directives include rules which have historically prevented the UK from introducing the zero-rate to goods and services even when there was a clear social benefit for such a change. The lowest rate permitted by the EU is 5% and UK governments have therefore had to be satisfied with that when they might otherwise have reduced VAT to 0% on items such as energy-saving materials or property conversions.

There are, of course, plenty of zero-rated supplies in the UK – new housing and children’s clothes being examples. But those zero-rates were agreed under ‘standstill’ arrangements when the UK joined the Common Market and first introduced VAT in 1973. That agreement allowed the UK to preserve the tax-free status, but with a strict moratorium on adding to that list.

After the end of the transitional period (expected to be from January 1, 2021) the government’s hands will no longer be tied and there will be a clamour from various industry sectors to extend VAT relief. We can expect an early announcement on feminine hygiene products where the EU’s rules were cited as being particularly inflexible and VAT earned the dubious title of ‘tampon tax’.

How the Chancellor handles this new freedom will test his political and economic skills. He must still try to balance the books so a widescale reduction in VAT is unlikely. However, he could target sectors such as construction to boost the economy and to make it cheaper to repair and improve our housing stock. The hotel sector have long argued for a lower VAT burden and small businesses who face a cliff-edge when first crossing the VAT registration threshold might be another area where he could usefully employ his new powers.

One paradox is that the Chancellor may decide to apply VAT to items which are currently zero-rated. In the past such a move was avoided because it would have been irreversible. Under EU rules, once a zero-rate was removed, it could never return. Food is an area where zero-rating sometimes seems at odds with any social purpose. For example, if you went to a supermarket and purchased a bottle of water and a sugar-laden cake, then you might be surprised to discover that it is the cake rather than the water that is zero-rated. The problem is that rectifying these anomalies is often difficult. The last chancellor to attempt any reform was pilloried for introducing a ‘pasty tax’ – a good indication of the strange and complex world of VAT on food.

What seems certain is that future budgets will herald far more changes to VAT than in the recent past. The challenge for the Chancellor is how to satisfy all competing lobby groups whilst making decisions which are good for the economy and do not add to the complexities for businesses.

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