Seventy-six percent of corporate directors and senior managers surveyed by Interim Partners said that they would like George Osborne to cut the rate of VAT in 2013.
An overwhelming majority – 88% – said they opposed an increase in interest rates, while more than half said they were against further quantitative easing measures.
Mark Agnew, senior VAT consultant at Baker & McKenzie in the UK, said the high street would benefit most from a cut in VAT. However he pointed out: “As there is no legal obligation for retailers to pass on any VAT cut to consumers it is not certain that the full benefit will be passed on to shoppers and encourage them to spend more.”
He also argued that a small reduction in the rate of VAT alone would be unlikely to encourage real growth in the UK economy.
“A marginal cut – say 2% – in the VAT rate is unlikely to provide a significant stimulus to UK growth, although it will leave a bit more in people's pockets. Estimates are that a 1% change in the VAT rate is worth around £5 to £6 billion to the Treasury, so it is an expensive decision for any government.”
Andrew Smith, chief economist at KPMG, said that while a cut in VAT would leave consumers with more money, there is the possibility that people are in saving mode and therefore would not be inclined to increase their spending simply due to a cut in VAT.
“The Chancellor hasn’t got a lot of leeway in his finances. You have to ask where he would recoup the money from,” Smith continued. “It is not obvious that a reduction in the rate of VAT would be the best route.”
Smith points to increases in the personal tax allowance as an example of a more efficient way of encouraging consumers to spend more. He said: “What you want to do is give more money to the income constrained.”
In an open letter to Chancellor of the Exchequer George Osborne last month, leading figures in the tourism industry claimed that a VAT cut for hotels and visitor attractions would generate an extra £4 billion ($6.5 billion) a year for the UK economy.
The letter’s signatories – which included chief executive of Travelodge, Grant Hearn, and chief executive of Merlin Entertainments, Nick Varney – urged Osborne to cut the 20% VAT rate for hotels and visitor attractions down to 5%.
HMRC estimates that the cost to businesses to comply with any change to VAT would be £300 million.
