VAT cut UK: what is government proposal, how much could tax go down - will it ease cost of living crisis 2022?

The UK government is considering a VAT cut in a bid to ease cost of living pressure on households and businesses, according to media reports.

Inflation is currently sitting at a record high of 9.1% as a result of the Russia-Ukraine war and post-Covid demand for energy, with the UK’s rate currently the highest in Western Europe.

It means prices for products and services, such as energy bills and fuel costs, are rocketing at a rate which household budgets are struggling to keep up with.

So how much is VAT - and how could a VAT cut ease the cost of living?

Here’s what you need to know.

What is VAT?

VAT, or Value Added Tax, is a tax that is applied to many everyday goods and services in the UK.

It is a significant source of income for the Treasury, raising more than £130 billion in the 2021/22 tax year, according to the Office for Budget Responsibility (OBR).

This figure equates to roughly 15% of all tax receipts received by the Treasury and amounts to 5.3% of the UK’s national income.

A lot of the products you see in shops have already had VAT added.

However, items like food, sanitary products, childrens’ clothing, newspapers and magazines have no VAT added to them.

There is also a lower rate of VAT for products like children’s car seats and household energy bills.

How much is UK VAT?

UK VAT currently sits at 20% - a level it has been at since 2011.

It had been at a rate of 17.5% for 20 years.

However, Gordon Brown’s Labour government reduced it temporarily to an emergency level of 15% between December 2008 and December 2009 as part of a bid to lessen the impact of the recession that followed in the wake of the financial crisis.

During the Covid pandemic, the Chancellor Rishi Sunak temporarily reduced VAT to 5% for hospitality and tourism firms as part of a bid to help them cope with lower demand.

Would a UK VAT cut ease cost of living?

According to a report by The Times, Boris Johnson’s chief of staff Steve Barclay has suggested VAT should be reduced.

The temporary cut would make many products and services cheaper, which could slow down or reverse inflation.

Such an outcome would help most Brits to cope with the cost of living crisis.

However, according to The Times report, the Treasury is concerned the policy would cost too much money, would benefit the rich as much as the poor, and may actually increase inflation.

More economic activity - for example, people increasing demand for goods and services by buying more of them - generally pushes inflation higher.

It is understood the Treasury fears this could provoke a longer, more severe recession than the one that’s currently forecast.

Reducing VAT to its pre-2011 level of 17.5% would cost the government £18 billion.

It comes as the Prime Minister has faced pressure from MPs to do more to ease the cost of living crisis.

He has recently promised to introduce more support.

In a letter sent to MPs on the day of the June confidence vote on his leadership, Boris Johnson wrote: “We will of course devote all our energy to reducing the biggest single household outgoing of all — the tax bill.

“It must come down, and it will, because that is the best way to deliver the growth we need.”