Is there any point in changing the rate of VAT again?

Calls are being made, in the run up to next month’s Budget, for a drop in the rate of VAT.

  • Would such a measure really help stimulate the economy when shops can always discount to attract sales instead?
  • When would the rate go back again?
  • Would consumers really benefit/understand?
  • What about the cost to small business?

Ed Balls, the Shadow Chancellor has suggested a rate change. This was done by his predecessor, Alistair Darling back in 2008, when the rate dropped to 15%. It of course rose up again subsequently.

The idea of making a cut in the rate of VAT is based on the fact that it works quickly. It takes months for HMRC’s computers to work through a change in PAYE codes. Changing tax rates or personal allowances will do the same thing, but due to the time delay of implementation it does not increase consumer spending quick enough.

Market forces will also bring about a changes in prices, and the consumer who is not VAT registered is only going to take into account the total paid, so whether a discount is created by a decrease in VAT, or an “End of Season Sale” is not really going to worry many people, aside from which there is no VAT on food, children’s clothing and bank charges, and a reduced rate applies to utilities.

The downside of frequently changing the rate of VAT is two-fold:

  • Consumers lose out – they do not know whether the price they are paying is good or bad. It can be impossible to tell what part of any discount is passed on when every other shop has a different type of sales promotion.
  • Businesses face increased costs of making the changes to labels, tills, computers and accounting systems.

What goes down must go up...

The standard rate of VAT is/was:

20% from 4/1/2011

17.5% from 1/1/2010 to 3/1/2011

15% from 1/12/2008 to 31/12/2009

17.5% to 30/11/2008

See VAT Rates & Fractions