The current COVID-19 crisis has led to much speculation that the Chancellor may soon announce changes to the VAT rate in order to boost the economy.
A VAT rate cut would temporarily lower prices with a view to encouraging consumer spending. The changes could either be to temporarily lower the standard rate of VAT (currently 20%) and/or to introduce a reduced rate for those sectors hardest hit by the pandemic, such as tourism and entertainment. The UK’s reduced VAT rate is 5% which currently applies to certain supplies of fuel and power and property conversion works. The last time the UK VAT rate was temporarily cut was in 2008.
Other countries such as Austria and Cyprus have already cut VAT rates for the tourism sector. If the UK follows suit, businesses should consider the impact this change will have on their VAT accounting systems. A change would mean ensuring accounting systems can deal with different VAT rates, both when issuing sales invoices and receiving supplier invoices. Following a change in VAT rate, the legislation provides for special time of supply rules (known as the tax point). These rules will determine when businesses account for VAT.
We will update Mercer & Hole’s COVID-19 Business Support Hub as soon as any such changes are announced.