The Effect of Inflation on VAT Rates

It’s no surprise that inflation is on the forefront of everyone’s mind, with prices continuing to sky-rocket month by month. Data from the United Kingdom shows that the Consumer Prices Index (CPI) inflation jumped to a 40-year high of 9% in the past 12 months. Governments around the world are looking for ways to reduce the burden for consumers to keep global economies afloat. One method – implementing VAT rate cuts to certain goods and services – looks to be coming out on top as multiple countries around the world announced emergency budget sessions or introduced proposals to temporarily cut VAT rates.

Temporary VAT rate cuts are generally quick and easy to implement, which is why they are favored by governments globally. These cuts essentially allow for a boost to the economy by providing consumers with an overall higher amount to spend, incentivizing consumers to spend now while rates are lower.

Country proposals for VAT rate cuts

As expected, many countries have already announced VAT rate cuts or measures to stimulate their economies:

• United Kingdom: Reports indicate that the Labour Party is pushing for an emergency budget session to demand VAT rate cuts for the hospitality industry. Previously, due to Covid-19, the UK implemented a temporary reduced rate of 13.5% on hospitality services which ended last month. Leaders suggest that the temporary rate reversal has cost the industry and should be re-implemented.
• Slovenia: The Slovenian Parliament is currently reviewing a proposal to reduce energy and digital newspapers and journals from the standard VAT rate to 5%. This comes as inflation in Slovenia hits 6.9%.
• Germany: German consumer groups are calling for VAT rate cuts on food, which had been previously ruled out due to restrictions in the EU VAT Directive.
• Bulgaria: The Bulgarian government has proposed temporarily reducing VAT rates on domestic heating and bread for one-year, effective 1 July 2022.
• Poland: Earlier this year Poland enacted VAT rate cuts for energy and certain basic food products. However, these rate cuts are only in place until 31 July 2022. The Polish government has indicated that these measures may be extended to continue to combat inflation.
• Bahrain: A group of ten MPs are advocating for a suspension of the 10% VAT rate in Bahrain to help ease inflation rises, which was presented to the Bahrani government earlier this week.
• Ireland: The Irish government has agreed to an extension for the reduced 9% VAT rate for the hospitality sector, now ending on 1 March 2023.

Additional countries such as Estonia, Netherlands, Latvia, Greece, and Turkey are also taking measures to implement VAT rate cuts to fight the ever-rising costs for consumers.

These VAT rate cuts coincide with new measures passed recently by the European Commission allowing Member States to apply reduced rates to more items, including food. Though many Member States seem to be moving towards taking advantage of this new flexibility on VAT rate reductions, it’s expected that as costs continue to rise more Member States and countries around the world will introduce VAT rate cuts to ensure consumer spending doesn’t continue to trend downward.