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Cut the VAT rate to create jobs

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Would a reduction in the VAT rate create employment opportunities by stimulating demand through lower prices?

Many in the UK’s construction, hospitality, leisure and tourist sectors are campaigning for the Chancellor to lower VAT rates before the next general election in a bid to stimulate growth in the UK economy.

In principle, the UK could, like many of its EU neighbours, apply a VAT reduced rate of five per cent to many labour-intensive services provided direct to the final customer. 

A reduced VAT rate could therefore be applied to, among others, the repair and maintenance of private dwellings, restaurant and catering, hotel accommodation and admissions to amusement parks, concerts and other cultural events.

The question is, though, in times of austerity, would a reduction in VAT result in a sufficient increase in demand from customers to create the significant new jobs being projected by these sectors? 

Apparently not, given the Chancellor’s “Plan for Growth” issued as part of the Autumn Statement. But there are a few years until the next election!

David Wilson is VAT and indirect taxes associate director at Baker Tilly.

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