Downing Street pushes for VAT to be cut from 20%

No 10 has proposed a temporary cut in VAT from 20% but Treasury pushes back, worried about real and long-term cost of overstimulating the economy

Downing Street has proposed a cut in VAT, the tax which is levied on most goods and services, in a bid to curb inflation and ease the cost of living.

Steve Barclay, the prime minister’s chief of staff, has suggested reducing the 20 per cent headline rate of the tax, according to The Times.

Such a temporary cut would reduce the tax bill for millions of small business owners, who have to charge VAT once their revenue exceeds £85,000, as well as stimulate demand.

>See also: Government urging firms to cut prices with no extra help

It would cost the government about £18 billion to cut VAT to 17.5%

However, the Treasury is concerned about the price tag of a VAT cut and has warned such a move could ultimately fuel inflation by overstimulating the economy.

One source told the newspaper that a potential VAT cut was discussed by Treasury officials last month but rejected. They were worried it could lead to a temporary fall in inflation followed by a longer, deeper recession.

>See also: Risk of small business failure halves in 2022

Labour chancellor Alistair Darling cut VAT from 17.5 per cent to 15 per cent immediately after the financial crisis in 2008. That approach was credited with helping the economic recovery after the financial crisis.

Missed opportunity

However, chancellor Rishi Sunak gave no indications of further support for businesses when he spoke at the British Chambers of Commerce annual conference in Westminster yesterday.

BCC director-general Shevaun Haviland lambasted the government for a “missed opportunity” in the spring statement and that ministers had until the autumn budget “to reset and rethink”.

She warned that time was running out for the government to “get its house in order” and “save the economy” from a growing crisis.

The head of one of Britain’s biggest business lobby groups, which has 70,000 member companies, said that it was time for a long-term economic strategy for growth.

In particular she called for an urgent review of the shortage occupation list — which highlights where there are insufficient workers to fill certain roles — to ease the worker supply problem.

Haviland also urged the chancellor not to impose tax rises on business before his corporation tax increase from 19 per cent to 25 per cent next April.

“If we want to give businesses the headroom to invest and grow there must be no more business tax increases for the duration of this parliament,” she said.

Further reading

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Tim Adler

Tim Adler is group editor of Small Business, Growth Business and Information Age. He is a former commissioning editor at the Daily Telegraph, who has written for the Financial Times, The Times and the...