A temporary reduction in VAT from 20% to 5% for worst hit sectors
July 14th, 2020
Chancellor’s Summer statement
A temporary cut in the sales tax from 20% to 5% has been announced by the UK government for attractions, meals and accommodation. Chancellor Rishi Sunak proposed the measure during his Summer Statement in order to provide relief for some of the sectors worst hit by the coronavirus pandemic.
The VAT rate on food, non-alcoholic drink, accommodation, and attractions in the UK will be cut to 5% between 15 July and 12 January. This period may seem to be prime opportunity for consumers – housebound by lockdown for some months – to enjoy cheaper days and meals out. However, the announcement is rife with complications.
Though nominally an incentive to get the public spending again, the reality of the situation for many businesses in the sector means their prices may not adjust at all. Government ministers hope that businesses choose to replicate their response to the VAT cut during the 2008 financial crisis, when 8 out of 10 reported passing on the saving to customers. However, after weeks without income, many are likely to opt out of passing on the reduction, choosing instead to keep the extra money that would have been sent to HMRC in order to survive.
The measure also leaves some sectors, such as hospitality, operating on three different rates of sales tax. Alcohol will see a 20% VAT rate, there is a 0% VAT rate on cold takeaway food, and everything else will now see a temporary 5% rate. This adds an administrative headache to the financial pain and safety concerns.
Safety and perceived safety add further complications. How many people will venture out to newly opened hotels, restaurants and theme parks? Even if savings are passed down to customers, fear of infection – which was compounded by the government’s ‘stay at home’ campaign – may keep many people away.
If guests and diners do return, they will not return in the same numbers as pre-covid. Even if the public are willing, the new safety measures required to make businesses ‘covid-secure’ bring their own limitations. Social distancing will reduce the number of individuals any venue can hold and many businesses will experience an increased turnaround time between customers as they disinfect.
Urgency vs effectiveness
Some, such as the Association of Chartered Certified Accountants’ Chas Roy-Chowdhury, have argued that the drop in VAT should have been delayed until a vaccine was available or better treatment developed. By waiting until there was a greater sense of public safety and security, the measure could have been more effective.
Though a logical suggestion, there is no known projected date for these developments. The stark fact of the matter is, without any intervention now, many of these businesses may not be around by then.
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