UK COVID-19 VAT rate cut speculation

The UK is considering a COVID-19 cut to its standard Value Added Tax rate, currently 20%, according to various media reports. Any announcement could come in July, to coincide with lockdown easements, with the aim to reduce prices and kick-start consumer spending.

Germany has announced a temporary VAT rate cut from 19% to 16% from 1 July until the end of 2020.

UK VAT revenues in April 2020 were down 42% - receipts were £35billion compared to £61billion in April 2019. This reflected the closure of most retail businesses and the furloughing of 4 million workers at the time. The number for June is estimated at 9.1million workers.

The evidence for the economic effectiveness of crisis VAT cuts is mixed. There is conflicting evidence of the measure achieving its goal of reduced prices for consumers. 

• The UK Labour government temporarily cut VAT from 17.5% to 15% between 1 December 2008 and 31 December 2009. This emergency measure was implemented to support consumer confidence as the 2008 financial crisis gripped the country. It was estimated to cost around £12 billion. Shoppers canvassed at the time by a number of organisations overwhelmingly said it had no impact on their expenditure. Retailers, when surveyed, gave a similar response. Only 20% of them claimed to have not passed the reduction on.
• In 2009, France reduced restaurant and catering VAT from 19.6% to 5.5%. Studies of the tax stimulus measure concluded that prices fell by 45%; the balance being retained by the business owners.