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  • There is still no sign of any significant Brexit VAT rate cuts

    3 February 2022

    Keith Miller

    You may have read my article last year about how the UK lags behind the EU in relation to the VAT reliefs that apply to the hospitality sector (restaurants, bars, cafes, hotels, etc).

    As Covid hit, the scope for reducing VAT rates across the EU was limited for many EU countries because of the low rates they had already applied to hospitality services, whereas the UK was able to drop the VAT rate from 20% to 5%, if only temporarily (the UK VAT rate applied to hospitality services was increased to 12.5% on 1 October 2021 and will revert back to 20% on 1 April 2022).

    The VAT reduction applied to hospitality services was not necessarily applied to enable prices to be reduced (although a temporary VAT rate cut may have enabled this in some cases) but principally helped businesses keep more of the price charged to consumers while the public were encouraged to support hospitality businesses.

    You may also recall my argument that the government should have used this opportunity to reduce the hospitality VAT rate more permanently to bring us in line with other major European countries (the UK was the only European country other than Denmark not to have already applied a reduced-rate of VAT to any of its hospitality services prior to Covid). 

    However, the government have clearly shown no appetite for this, and we’ll be back to normal from April, at a time when the hospitality sector could do with some support in its struggle to recover.

    A similar discussion has now arisen around VAT on domestic fuel.  The difference here is that the UK has applied the minimum VAT reduced-rate of 5% to domestic fuel supplies since September 1997, whereas many EU countries have not historically applied the minimum reduced-rates, so have recently been cutting their VAT rates in response to the recent hike in domestic fuel prices.  

    An interesting aspect of this is that I have seen a number of people, in response to the news that a number of EU countries are reducing VAT on fuel bills, argue that the UK would also have been able to do this had we remained in the EU.

    The reality is that had we remained in the EU, it would not have been possible to reduce the VAT rate on fuel below the current 5%, whereas now the UK government is no longer bound by EU VAT rules, they are free to reduce the VAT rate on any supply to 0% should they so desire.  In fact, in the lead up to the 2016 EU referendum both Boris Johnson and Michael Gove indicated that VAT on domestic fuel would be scrapped.  In reference to VAT on fuel bills, Johnson claimed that “when we vote Leave, we will be able to scrap this unfair and damaging tax” with Gove saying that it “has to be the top priority.”

    It is ironic that although this is perhaps one of the few Brexit claims that actually has some credibility, the government has so far steadfastly refused to utilise it.

    In response to the government’s refusal to reduce VAT on domestic fuel supplies, the Labour Party has pledged to apply the lowest VAT rate (0%), particularly in light of the current fuel price crisis, funded by a windfall tax on North Sea Oil and gas profits. The government has argued that a VAT reduction is not sufficiently ‘targeted’ to warrant a change because it would not only benefit those in need but also those who do not need financial support (which is perhaps a valid point to an extent but is not consistent with the Prime Minister’s previous pledges).  Others argue that VAT disproportionately affects the poorest in society so any cut is welcome, although another fact that cannot be ignored is that increases in fuel prices without a reduction in the VAT rate will deliver a significant cash boost to the Exchequer, a fact that will not be lost on the Chancellor.

    There have been a couple of VAT rate changes since 1 January 2021 that wouldn’t have been possible had the UK remained in the EU, although one may have arisen anyway even if we had stayed in the EU, and the other was temporary.  

    The first was that VAT on women’s sanitary products was scrapped on 1 January 2021. Although the change was welcome, campaigners argued that the wider movement to abolish what had become known as the ‘tampon tax’ across the EU may have been derailed by the UK leaving the EU (and the VAT cut being applied unilaterally in the UK and claimed by the UK government as a Brexit benefit).

    This is because the European Commission had published proposals in 2018 to change EU VAT rules to allow EU countries to scrap the tampon tax and the campaign for this was gaining momentum before the UK left the EU.

    It is argued that although enabling the change in the UK, Brexit has derailed the wider campaign, since much of the momentum had come from campaigners in the UK, which no longer has any influence.

    The other change was the temporary VAT zero-rate applied to PPE equipment in 2020.  

    All of this should come as no surprise, however, as VAT has always been a bit of a political pawn, as can be seen if we look at the history of the VAT standard rate in the UK.

    When VAT was introduced in April 1973, the Conservative government set the standard-rate at 10%. In 1974, the new Labour government reduced this to 8% (with a new ‘luxury’ rate of 12.5%).  The standard rate stayed the same until 1979, when the new Conservative government increased it to 15%, abolishing the 12.5% luxury rate in the process.

    The standard rate then stayed at 15% until 1991, when it was increased to 17.5%.

    It is notable that although they didn’t reduce the standard-rate of VAT when elected in 1997, it was the Labour government that reduced the VAT on domestic fuel to the current 5% level (which, as EU members, was the minimum possible at the time).  This was one of the new Labour government’s election pledges, after the previous Conservative government had increased VAT on domestic fuel bills from 0% to 8% in 1993 despite pledging no VAT increases in their 1992 election manifesto. They also tried to apply 17.5% VAT to fuel bills in 1994 but were voted down. 

    In response to the effects of the financial crisis in the late 2000s, Labour also temporarily reduced the VAT standard-rate to 15% from Dec 2008 to December 2009.  

    The current 20% standard-rate was introduced by the Conservative/Liberal coalition in 2011.  

    We still wait, however, for the first significant UK VAT rate cut that wouldn’t have happened had we remained in the EU.  But don’t count out an increase in the standard-rate of VAT in the meantime, though.

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    Please provide as much detail as possible in regards to the reason for your enquiry so our tax advisers can prepare and tailor their response to reflect your needs. We will endeavour to - respond / call you back - to discuss your enquiry and you will not be charged for this time.

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