Cut VAT rate to boost economy, say accountants

3 Jul 2020: An ICAEW poll has found that accountants consider a cut in VAT rates to be the most effective way of boosting the UK economy following the coronavirus crisis.

ICAEW asked members what they felt was the most effective way to stimulate the UK’s post-COVID economy and the most favoured measure was a cut in VAT rates. 

Just under 240 members responded to the poll, 40% of whom listed VAT rate reduction as their preferred option to stimulate the economy, with other popular choices including reductions to Employer’s National Insurance Contributions, business rates and income tax.

At the other end of the scale, just 1% of respondents felt that cutting corporation tax would be of most benefit to the UK economy. Capital Gains Tax measures also did not feature high on the list, with only 3% of accountants calling for a cut as a top priority.

Question: In your view, which ONE of the following Government actions would be most effective in aiding the recovery of the UK economy?

Answer	%
Cut CGT to encourage start-ups and entrepreneurs	3
Reduction in VAT rates	39
Reduction in Employer’s National Insurance Contributions	21
Reduction in Income Tax and/or employees’ NIC	14
Increase tax reliefs for capital investment	5
Reduce business rates to help the High Street	18
Reduction in Corporation tax	1

Labour Chancellor Alistair Darling was the last Chancellor to cut the standard rate of VAT when in response to the late-2000s recession he reduced it from 17.5% to 15% with effect from 1 December 2008 – an act judged by the Institute for Fiscal Studies to have helped stimulate consumer spending.

From 1 January 2010, Darling returned the rate to 17.5% and from 4 January 2011 the then newly minted coalition Chancellor George Osborne raised it to its current level of 20%.

Another factor to consider in any decision regarding VAT is the UK’s impending exit from the European Union, which means that it will no longer be obliged to operate within parameters set by EU VAT directives.

This leaves open the opportunity for flexibility for the first time in 40 years to make dramatic changes to its VAT regime or even abolish it entirely for a new form of sales tax. However, the probability of any radical change is seen as low. VAT is a major revenue raiser for the government, raising £125bn in 2017/18, which amounts to 18% of tax receipts. Whitehall watchers feel that a temporary reduction in VAT rates, similar to that adopted during the financial crisis of the late 2000s, is the most realistic option.

* ICAEW’s quick poll asked members one question: “In your view, which ONE of the following Government actions would be most effective in aiding the recovery of the UK economy?” The poll was open from Monday 29 June 2020 to Thursday 2 July 2020 and had 239 responses. The results do not reflect that of ICAEW as an organisation.