This article is from the source 'bbc' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.
You can find the current article at its original source at https://www.bbc.co.uk/news/explainers-53334098
The article has changed 5 times. There is an RSS feed of changes available.
Version 3 | Version 4 |
---|---|
What is VAT and how does it work? | What is VAT and how does it work? |
(32 minutes later) | |
Chancellor Rishi Sunak's cut to the rate of value added tax (VAT) on hospitality and tourism from 20% to 5% has now started. | Chancellor Rishi Sunak's cut to the rate of value added tax (VAT) on hospitality and tourism from 20% to 5% has now started. |
It lasts until 12 January 2021 and applies to food and non-alcoholic drinks as well as accommodation and admission to attractions across the UK. | It lasts until 12 January 2021 and applies to food and non-alcoholic drinks as well as accommodation and admission to attractions across the UK. |
Mr Sunak said the move is designed to "get the sectors moving and to protect jobs", but what is VAT and how does it work? | Mr Sunak said the move is designed to "get the sectors moving and to protect jobs", but what is VAT and how does it work? |
What is VAT? | What is VAT? |
Value added tax, or VAT, is the tax you have to pay when you buy goods or services. | Value added tax, or VAT, is the tax you have to pay when you buy goods or services. |
The standard rate of VAT in the UK is 20%, with about half the items households spend money on subject to this rate. | The standard rate of VAT in the UK is 20%, with about half the items households spend money on subject to this rate. |
There is a reduced rate of 5% which applies to some things like children's car seats and home energy. | There is a reduced rate of 5% which applies to some things like children's car seats and home energy. |
The lower rate also currently applies to sanitary products, although in the March 2020 Budget, the government announced it will stop charging VAT on these goods from 1 January 2021. | |
When you see a price for something in a shop, any VAT will already have been added. | When you see a price for something in a shop, any VAT will already have been added. |
There are also various items for which you do not have to pay any VAT, such as most supermarket food, children's clothing, newspapers and magazines. | There are also various items for which you do not have to pay any VAT, such as most supermarket food, children's clothing, newspapers and magazines. |
How much money does VAT raise? | How much money does VAT raise? |
The Office for Budget Responsibility (OBR) predicted in March that VAT would raise £136.6bn in 2019-20. | The Office for Budget Responsibility (OBR) predicted in March that VAT would raise £136.6bn in 2019-20. |
That is equivalent to around £4,800 per household and represents 16.8% of all the money the government receives from taxes. | That is equivalent to around £4,800 per household and represents 16.8% of all the money the government receives from taxes. |
VAT accounts for around 6.2% of GDP, the total value of goods and services produced in the economy. | VAT accounts for around 6.2% of GDP, the total value of goods and services produced in the economy. |
How does this compare to other taxes? | How does this compare to other taxes? |
In 2018-19 VAT was the third biggest income generator for the UK government, after income tax and national insurance contributions. | In 2018-19 VAT was the third biggest income generator for the UK government, after income tax and national insurance contributions. |
These three taxes together raise more than half of government tax receipts. | These three taxes together raise more than half of government tax receipts. |
How has VAT changed over time? | How has VAT changed over time? |
The standard rate of VAT increased from 17.5% to 20% on 4 January 2011. | The standard rate of VAT increased from 17.5% to 20% on 4 January 2011. |
In 2008, following the financial crash, the government introduced a temporary cut in the rate of VAT to 15%. | In 2008, following the financial crash, the government introduced a temporary cut in the rate of VAT to 15%. |
The rate cut lasted from 1 December 2008 to 31 December 2009 and cost the government £12.4bn in lost revenue. | The rate cut lasted from 1 December 2008 to 31 December 2009 and cost the government £12.4bn in lost revenue. |
The aim of the cut was to boost consumer spending with retailers expected to pass the reduction on to customers. | The aim of the cut was to boost consumer spending with retailers expected to pass the reduction on to customers. |
At the time, opinion was divided about the policy with then Conservative leader David Cameron calling it an "unbelievable and expensive failure". | At the time, opinion was divided about the policy with then Conservative leader David Cameron calling it an "unbelievable and expensive failure". |
The Institute for Fiscal Studies was more supportive. It predicted a growth in sales of about 1% and said a VAT cut compared well with other incentives. | The Institute for Fiscal Studies was more supportive. It predicted a growth in sales of about 1% and said a VAT cut compared well with other incentives. |
Measuring the overall impact proved challenging, because no-one could know what would have happened without the rate cut. | Measuring the overall impact proved challenging, because no-one could know what would have happened without the rate cut. |
Mr Sunak's six-month cut for hospitality and tourism is set to cost the government £4.1bn. | Mr Sunak's six-month cut for hospitality and tourism is set to cost the government £4.1bn. |
Are companies passing on the VAT cut to customers? | Are companies passing on the VAT cut to customers? |
The Treasury estimates households could save £160 a year on average, but not all firms will pass on the benefit. | The Treasury estimates households could save £160 a year on average, but not all firms will pass on the benefit. |
Many companies are expected to use the windfall to shore up finances hit by the lockdown, rather than cut prices. | Many companies are expected to use the windfall to shore up finances hit by the lockdown, rather than cut prices. |
For example, Malcolm Bell, chief executive of Visit Britain, said the chancellor's move was to support business, not help holidaymakers. | For example, Malcolm Bell, chief executive of Visit Britain, said the chancellor's move was to support business, not help holidaymakers. |
And many attractions such as museums, parks and zoos, might also not pass on the reduction. | And many attractions such as museums, parks and zoos, might also not pass on the reduction. |
However, Starbucks has said it will pass on the full 15% discount on coffee served in company-operated stores. | However, Starbucks has said it will pass on the full 15% discount on coffee served in company-operated stores. |
McDonald's has recommended that its franchisees cut prices on an array of products, and pub chain Wetherspoon said it would reduce prices on meals, coffee and soft drinks. | McDonald's has recommended that its franchisees cut prices on an array of products, and pub chain Wetherspoon said it would reduce prices on meals, coffee and soft drinks. |
How does the UK compare to other countries? | How does the UK compare to other countries? |
The UK's VAT rate of 20% seems to be roughly in the middle when compared with European Union countries. | The UK's VAT rate of 20% seems to be roughly in the middle when compared with European Union countries. |