Will We See a Cut in VAT Soon?

29 November 2016, 16:42

VAT has been at 20% for some time now. However, there is a chance we could soon see a change in that rate – and it could be lower than we’ve seen it in a while.

This week sees the Chancellor’s Autumn statement – an annual mini-Budget that sets the tone for the next six months and paves the way for the annual Budget that takes place every March. This year will be particularly interesting because it will be new Chancellor Philip Hammond’s first mini-Budget since taking the role in Prime Minister Theresa May’s cabinet earlier this summer.

While nothing will become clear until the statement takes place on Wednesday 23rd November, it is thought he will hint at the idea of reducing the rate of VAT in the annual Budget next March. This looks to be a temporary measure if it does occur, and may stem from the fallout over Brexit. The pound has weakened over the last few months, and inflation has been creeping up as well. Therefore, a drop in VAT would reduce prices and encourage people to keep spending and feeding money into the economy.

Presumably, if the rate cut did take place, this would lead to a boost for the economy at a time when it is much-needed. It will only last for a time, though, before being returned to the 20% rate again. At least, this looks to be how things will play out. We are not expecting a firm announcement on a change to the VAT rate this week, but we may get some suggestions and hints that this will happen soon. Watch out for the March Budget to get firm facts on whether it will occur, but it looks like it will.

In the run-up to Christmas, sales are looking healthier than they may have done previously. However, this could be temporary, which is why it’s thought the Chancellor will look at reducing VAT in the New Year rather than immediately. There may be no big changes in this mini-Budget, and of course, reducing VAT means reducing receipts for the Government. They would need to find a way to manage the reduction in income, and delaying the announcement until March gives them time to do this.

We would all benefit from a lower VAT rate, but it’s unclear whether the boost to the economy from such a reduction would be worth it. Many people are keen to save money rather than spend it, although this will change in the run-up to the festive season. It’s not clear what the future holds, but we will be watching with interest to see how VAT is approached by the new Chancellor – both now and in the months to come. We expect an announcement in March, but no more than a hint or two this week.