Mini Budget 2022: VAT

With the mini budget announcements now made, what is the effect of the announced VAT changes, compared to some of the predictions? This was published on 23 September 2022.

*For the latest information please see our mini budget summary

The actual changes:

1. VAT-Free Shopping

The announcement of a 0% VAT charge for tourists may have sounded like a dramatic boost for the tourism industry, but of course a similar scheme is in effect in Northern Ireland and was in operation in Great Britain until the start of 2021. Effectively, this is a reinstatement of the long-standing arrangement albeit with new technology promised to streamline the process.

The new scheme will allow overseas visitors to purchase goods from retailers in the UK free of VAT where they take these goods out of the UK with them once they leave the country.

The government had long considered ways to modernise the various versions of the Retail Export Scheme. While there are no specific details of how the new scheme will work pending a consultation, retailers will need to adapt their systems in due course which may entail significant short-term pain. However, it is hoped that this modernisation of the process to a digital platform will ease the administrative burden which was often experienced by tourists under the old system.

2. Sunset of EU laws and regulations

Perhaps the biggest potential change in practice is the bonfire (or “sunset”) of all EU laws and regulations (including those relating to VAT) by the end of 2023. These were retained in UK law as part of Brexit arrangements. Changes announced yesterday will, in the short term, enable the Government (via Parliament) to more easily amend, repeal or replace retained EU Law. Ultimately all remaining retained EU Law will either be repealed, or assimilated into UK domestic law, in most cases by a sunset date of the end of 2023.

We trust that due scrutiny and thought will be given to any changes to the VAT rules to minimise disruption to business and an increase in the level of uncertainty in the way the rules work. Previously well understood concepts, explained and expanded upon by case law, will be undermined if wording changes in the rules.

The predictions:

1. Reducing the 20% rate

Many businesses for whom a reduction in the VAT rate was at the top of their wish list have been left disappointed. However, not choosing to reduce the 20% standard rate of VAT may have been a wise decision.

This would have cost £7-8bn p.a. for each percentage point of decrease. However, for every 1% of such a cut which is passed on in full, consumers spending £1,000 would benefit from a price reduction of just £8.33. If the VAT rate had been slashed from 20% to 15%, it would have cost upwards of £35bn a year, but consumers would have to spend £1,000 before seeing savings of just £41.67. 

Most spending on essentials would not have been impacted at all as no VAT is ever charged on food, children’s clothes, residential rents, mortgages, insurance or bank loans*. If it had been solely the standard 20% rate that were reduced, residential energy bills (which are generally subject to the 5% reduced rate) would not have been affected either. Higher earners with disposable incomes would have stood to benefit the most, to the extent that they spent money on standard rated goods and services.

2. Reducing the 5% reduced rate on energy

Focusing a VAT cut purely on energy bills would have been cheaper for the Treasury (each 1% cut from the 5% reduced rate costs £500m p.a.). However, the saving for individuals would also have been modest, as a 1% cut saves just £9.52 per £1,000 spent on energy. Even if the VAT rate had been reduced to zero for such supplies (at a cost of £2.5bn p.a.), the saving on a £1,000 bill would have been just £47.62. 

*These items are generally either zero-rated or exempt, so a reduction in the standard 20% rate would not affect them.

Find out more

Please do get in touch to discuss this further and we’ll be happy to help you understand what today’s announcements mean for you.