Tax proposal

Cabinet split over VAT cut to ease cost of living

Stephen Barclay: has called for a VAT cut

UK government ministers are at loggerheads over a proposed cut in VAT to help households and businesses meet rising costs.

Stephen Barclay, the Downing Street chief of staff, wants to cut the 20% headline rate. He is being supported by ministers who also want Prime Minister Boris Johnson to tackle the tax burden. New official figures show more than two million workers have become 40% taxpayers under his government.

Chancellor Rishi Sunak is said to be resisting the move to cut VAT and is urging ministers to await his autumn Budget when he has promised a package of tax measures.

The Treasury fears cutting VAT now could backfire by fuelling inflation already at 9.1% and expected to hit 11% before the year end. Cutting the rate to 17.5% would also wipe £18 billion from already-stretched public finances.

One Scottish business leader said the cuts should be deeper and swifter. Liz Cameron, chief executive of the Scottish Chambers of Commerce, said: “At our recent meeting with the Chief Secretary to the Treasury, we called for bold and immediate action to provide businesses with urgent support. 

“The reported plans to temporarily cut VAT would be a helpful start if this is formally announced by the UK Government. 

Liz Cameron
Liz Cameron: proposed cut does not go far enough (pic: Terry Murden)

“However, this does not go far enough to mitigate the challenges that businesses face. The government must go further and introduce an SME energy price cap and cut VAT on business energy bills from 20% to 5%. Time is running out before we start to see businesses go under without this vital support.”

Paul Johnson, head of the Institute for Fiscal Studies, has argued against a VAT cut, saying it would pump extra money into an economy already struggling with an excess of demand over supply.

“Stimulating demand at the moment would be economically inappropriate. On this one the Treasury is right,” he told The Times.

Alistair Darling cut inflation from 17.5% to 15% immediately after the financial crisis in 2008 which was credited with helping the economic recovery, though the circumstances were different. Inflation was not an issue and unemployment was rising.

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