PBR 08: Tax experts lukewarm on VAT cut

Retailers, banks and insurance companies may benefit more than consumers from today's VAT cut announced in the pre-Budget report, tax experts said.

The cut in VAT from 17.5% to 15% was one of the centrepieces in Chancellor Alistair Darling's statement, a £12bn boost for the British economy aimed at reviving consumer spending.

But Richard Baxter, head of indirect taxes at Alvarez & Marsal Taxand, said: 'The fiscal stimulus but it remains to be seen how it will flow through to consumers in the short and medium term.'

The VAT cut from next Monday will be help reduce the amount of non-recoverable VAT paid retailers, banks and insurance companies.

Government figures predict that a 13 month period of VAT levied at 15p in the pound will generate 12.4bn of savings for consumers and business, but tax experts were sceptical.

'Stephen Herring, Senior tax partner at BDO Stoy Hayward said: 'The chancellor should have used a good part of the £20bn available for direct cuts in income tax which tax payers – and consumers – would have noticed every month in their pay packets. Will they really link the price paid to goods and services to the VAT reduction?'

Darling said: 'To prevent the recession deepening we all need to take action to put money into the economy immediately,' he said before announcing the measure.

Anne Redston, tax professor at Kings College, said: 'It's fairly optimistic to think that in 13 months the [economic] recovery will be under way, but the [VAT reduction] is nevertheless welcome.