VAT cuts: will businesses pass savings onto consumers?

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As the temporary slash in VAT comes into force, the hospitality sector is now able to cut prices.

The cut in VAT down from 20% to 5% will be in place until January 2021 and according to the chancellor, should allow households to save up to £ 160 a year.

However, after a difficult lockdown period for many businesses – will the benefits of a slashed VAT be passed onto the consumer?

Whilst Starbucks has announced plans to pass on the 15% discount to customers, many other businesses may use it to recover after trading stopped in lockdown.

“The government is gambling on the public to head out and spend, spend, spend in one of the hardest-hit sectors to get the economic cycle rebooted. It remains to be seen if businesses will pocket the difference or pass on the saving to patrons,” said Hinesh Patel, the portfolio manager at Quilter Investors.

McDonald’s and Wetherspoons have also said that it plans to cut prices on products, however, smaller businesses who are operating at a reduced capacity are likely to keep the savings in order to stay afloat following the lockdown.

When VAT was cut back in 2008 following the financial crisis, four of five businesses passed on the savings according to the Treasury.

As well as the hospitality sector, admissions to zoos, theatres, and cinemas will also be included in the VAT cut.