Darling Urged To Consider VAT Options In UK Budget

by Robert Lee, Tax-News.com, London

16 April 2009

While Chancellor of the Exchequer Alistair Darling has little opportunity to announce further fiscal stimulus measures in the upcoming budget given the extent of government borrowing, advisors KPMG believe that he has some options in the area of value-added tax that could help both consumers and businesses to see those promised 'green shoots' of recovery.

The government's much-vaunted 2.5% cut in the standard rate of VAT last year has been widely seen as a failed measure, largely owing to the substantial administrative cost to businesses, which haven't always passed on the tax cut to their customers, and this is unlikely to be extended when it expires at the end of the year. But if VAT cuts are to be used to stimulate the economy, the UK has another option open to it.

"The 27 EU Member States recently agreed that there should be an option for governments to apply a significantly reduced VAT rate of 5 percent to certain labour-intensive services, including the supply of restaurant and catering services (not alcohol), work on private homes, hairdressing and window cleaning," said KPMG.

"The UK has reportedly welcomed this agreement, but is yet to adopt any of the changes. With current UK VAT rates at 15%, due to increase to 17.5% at the end of the year, introducing a more radical reduction to a 5% rate would equate to substantially lower VAT bills for these sectors," the firm argued.

Amanda Tickel, Tax Partner, KPMG commented: “Such a sizeable VAT cut for labour intensive sectors could significantly shore up business margins and support employment in these sectors. If the UK does decide to implement reduced rates, following recent EU wide agreement on this issue, changes would provide a particularly boost to pubs and restaurants, and builders."

“Restaurants and pubs are feeling the squeeze from reduced consumer spending. This significant VAT reduction would legally give them two options; hand part of all of the reduction on to consumers to help drive demand through reduced prices, or use the tax saving to support their margins and stave off other cost cutting measures like redundancies.

“Builders would also benefit if the government were to widen the existing reduced rate reliefs for work on empty houses and apply it to housing repairs and renovations. This would have a real impact on costs incurred by home owners, and could stimulate demand for builders and those in related trades.”

KPMG also argues that the government could help businesses by waiving the default surcharge for late VAT payments arising out of the credit crunch problems and charge interest instead.

The current default surcharge is a flat 2, 5, 10 or 15% of the late VAT, depending on how many late payments have been made - a rate that KPMG considers "usurious" compared with the current low interest rates.

"Recognising credit crunch difficulties as a reasonable excuse for late VAT payments would be a way for the government to show flexibility in support of all business," said the firm.

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