The answer to post-covid... A VAT stimulus?

With the current state of the economy in question, and with the potential for a recession in the near future – following negative growth of the UK’s GDP in the last quarter, the Chancellor of the Exchequer, it seems, has been searching for initiatives to kick start businesses. 

What are the RUMORS?

One thing that Rishi Sunak seems to be considering and reported by much of the media – including the Independent, and the Financial times , are a reduction to the current 20% standard rate of VAT, which would be a huge impetus to SMEs getting back on track with the current push to get the economy moving and the loosening of ‘the lock down’. Sources claim that the chancellor could announce lowering the VAT and business rates in a speech in early July. However, a decision on the VAT cut will be made when data is available on whether the easing of the lockdown has prompted a sufficient rise in retail sales.

As businesses try and move forward and reinstate supply chains to make the cogs of the wheel turn again, cash flow is key. A reduction of the current 20% standard rate to 17%, or perhaps 15%, will help businesses who have to account for VAT on supplies and recover it on business expenses via VAT returns. VAT on costs are payable when they are acquired, and although VAT registered businesses are allowed to reclaim VAT paid on business expenses, this benefit is only obtained once returns are submitted, either by offset on the VAT due on sales or via a repayment from HMRC if sales made are zero rated.

Is a VAT stimulus the answer?

Shaving a few per cent from the standard rate will help with cash flow over the coming months, especially with the VAT payment deferment period ending at the end of June. However, it’s hard to predict the damage and scale to which COVID-19 has affected UK businesses, and how we can effectively stabilise the economy and get back on track, however, it’s evident from previous schemes installed, that the Government are committed to supporting wherever possible.