Thursday, 9 July 2020

"Coronavirus: Visitors may not see the thrill of VAT cut"

From the BBC:

... experts predict many businesses will not cut prices, instead using the money to save their ailing businesses.

The chancellor said the VAT rate on food, non-alcoholic drink, accommodation and attractions in the UK would be cut to 5% between 15 July and 12 January.

In theory, the rate change could mean a couple buying a pub meal costing £45 without alcohol would save £5.62, while a £54.50 one-night stay at a hotel in a family room would see a saving of £6.81, according to accountants Deloitte.

In practice, venues may decide to keep prices the same, but keep the extra money they would have sent to the tax authority. Providers will not refund those who have booked and paid for accommodation later in the summer, because the rate is for when the sale was made.

Many of these businesses find themselves on the brink, given they were closed for months during lockdown, and the Treasury believes that the choice should remain with these operators, rather than the government, on whether to pass on savings.

Well, firstly, hooray for VAT reductions, the worst tax of all.

We would expect - going by what happened when several European countries reduced VAT for restaurants and small service businesses ten years ago - that prices will not fall by very much, so businesses (and their employees, hopefully) will benefit most.

This is hardly surprising, as VAT on most things is almost entirely borne by businesses. Most spending, and in particular spending on eating out and theme parks is highly discretionary, so consumers are sensitive to prices and businesses have to swallow the VAT when it increases. The reverse applies when VAT is reduced, businesses don't need to drop prices much either.

So the "experts" are shouting about how wicked businesses are, pocketing that tax cut meant to benefit consumers. It would be far simpler to ditch the propaganda that VAT is a "tax on consumption" and admit that VAT is (largely) borne by businesses and their employees.


Sobers said...

Surely the whole point of the VAT tax cut on hospitality is to keep the businesses afloat? And the employees in work? Not to make eating out cheaper.
Chances are any restaurant opening up is going to struggle to break even even if they pocket all the VAT cut. After all the barrier to the hospitality trade opening up is not monetary - its not that people haven't got the cash to spend, if anything furlough has made people's bank balances grow not reduce. Its a non-monetary problem - people just won't want to come out in the current climate. Even if the food is cheaper. So all we can hope for is to allow restaurants etc keep as much of the money they can generate from those who are prepared to go out, so they stay trading, and keep people employed.

People who moan that the businesses will pocket all the VAT cut are missing the point by a country mile. Thats the entire aim.....

mombers said...

@L exactly - it's weird to say in a disapproving tone that

"many businesses will not cut prices, instead using the money to save their ailing businesses."

I'll take a slightly cheaper or same price restaurant meal over a closed restaurant any day. Anyone who thinks otherwise is bonkers

Mark Wadsworth said...

S, we are fully in agreement for once.

M, good point, me too.

Lola said...

The article referenced is therefore proof that VAT is a very bad tax?

ThomasBHall said...

Spiteful not to include booze in the VAT cut.

Mark Wadsworth said...

L, the article is proof that decades of brain washing about VAT being a "tax on consumption" is contradicted by real life.

But instead of 'experts' realising that it is a (primarily) tax on producers and not a tax on consumers, they twist the logic one more time and accuse producers of 'pocketing' the tax saving.

TBH, yes, but gotta keep the Puritans happy.