VAT : the temporary cut in the standard rate

In his Pre-Budget statement to the House on 24 November 2008, the then Chancellor, Alistair Darling, announced that, given the threat to the UK economy from the global recession, the Government would introduce “a £20 billion fiscal stimulus between now and April 2010.” In his view the “best and fairest approach” to delivering the major part of this stimulus was a temporary cut in the standard rate of VAT from 17½% to 15%, from 1 December 2008 to 31 December 2009, at a cost of £12.4 billion. Mr Darling also announced a number of measures to raise revenue over 2010/12, including an increase in the rates of National Insurance contributions for employees, employers and the self-employed by a ½ percentage point from April 2011. (As it transpired, Mr Darling announced the next year that the rates of NICs would actually go up by a full 1 per cent from this date – a tax increase implemented by the Coalition Government.)

The 2009 Budget report noted that although it was “too early to make a full evaluation of the impact of the VAT reduction … there have been some positive early signs of the reduced VAT rate having been passed through into lower prices, providing support to consumer spending.” Although there were some calls for the 15% rate to be maintained, in his Pre-Budget statement on 9 December 2009, Mr Darling confirmed that “VAT will return to 17.5% on 1 January, as planned.”

No further changes were made to the standard rate of VAT by the Labour Government, but following the establishment of the Coalition Government after the 2010 General Election, the new Chancellor, George Osborne, announced that the standard rate would be increased to 20% from 4 January 2011. This is examined in a second Library note (SN5620).