The Chancellor announced today that from the 15th July 2020 to the 12th January 2021, the rate of VAT for the hospitality and tourism industry will drop to 5%. The cut will apply to food, non-alcoholic drinks, accommodation and ticket prices for attractions across the UK. The proposal is aimed at providing a boost for this particular sector of the economy which has been so hard hit by Covid-19 and the lockdown.

How much is VAT right now?

VAT, or value added tax is currently 20% and applies to the vast majority of goods and services in the UK. There are a few exemptions such as certain basic foods, children’s clothing and certain medicines. When you pay for an item or service, VAT will be included in the price. VAT is currently the third biggest income stream for the government behind income tax and national insurance contributions.

Has there been a big VAT cut before?

The last time VAT was cut was back in 2008 after the financial crash, and was aimed at stimulating consumer spending with retailers expected to pass the reduction to customers. The cut cost the government £12.4bn in lost revenue, however the jury is still out on whether it had a positive effect on the economy.

A survey by the accountants PWC found that the cut made no difference to the spending habits of 88% of consumers. Whereas the Institute of Fiscal Studies said the VAT cut did have an effect and helped increase sales by 1%. Measuring the impact is particularly challenging, because no one can accurately say what would have happened to the economy without the VAT cut.

Will this VAT cut work?

The Chancellor has said that the changes to VAT should save households around £160 on average. Trips to the pub, family days out and visiting attractions should be significantly cheaper. The chancellor has said that our economy relies on consumption and intervention is required to prop up our pubs, cafes and restaurants.

This 6 month tax cut will cost the government £4.1 billion and will depend on whether people feel safe enough to venture out and spend time in restaurants, cafes and pubs. The fact that restrictions are being lifted means the government thinks it is now safe to go out. This cut is significant enough that it may well have a positive effect on our spending habits, however everything will all hinge on whether there is no second wave and shops do stay open.

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