Retail bosses have raised concerns privately about a temporary cut to VAT, warning that it could result in extra cash-handling that could increase the spread of coronavirus.
On a call between some of the biggest high street chains and the Department for Business, Energy and Industrial Strategy last Thursday, it emerged that there was growing momentum for a VAT cut as part of the government’s attempts to revive the economy.
However, sources have revealed that bosses at Primark, the discount fashion chain, have expressed reservations. They said that since VAT had been cut in Germany, staff at its 27 stores there had reported an increase in the amount of cash they handled because prices were no longer in round numbers. It is understood that there was a discussion between the retail chiefs about the issue when the sector has been working hard to reduce cash payments. A Primark spokesman declined to comment and said that the call was a private matter.
The Treasury is understood to be considering lowering the 20 per cent rate, but economists are divided over its effectiveness.
It is likely to create more administrative costs for businesses and its success will depend on whether the tax cut is passed on to the public. Even if it is passed on, consumers may not respond as desired. Retailers are already discounting heavily, but people are being held back by a lack of confidence. Analysts are dubious about whether another small reduction in prices would make a difference.
After the 2008 financial crisis VAT was reduced from 17.5 per cent to 15 per cent for just over a year. Two years later the Institute for Fiscal Studies, the think tank, concluded that the policy “was likely to have been an effective stimulus”.
According to HM Revenue & Customs, 80 per cent of businesses passed on the VAT cut to their customers, although most took the view that it had had little impact.
Primark is part of Associated British Foods, a FTSE 100 group part-owned by the Weston family. It is Britain’s biggest clothing retailer, with a 7.1 per cent share of the market, according to Global Data.
Amid concerns that Covid-19 can be transferred on coins and banknotes, shoppers have been urged to use contactless payments. One retail source said that there were more people with bank accounts in Britain than in Germany. However, they emphasised that those who would benefit most from a cut in VAT were the people who may not have bank accounts.
More than two million people still use cash and coins, according to UK Finance, the industry body, but last year the number of cash payments fell by 15 per cent to 9.3 billion transactions.
Primark reopened its stores for the first time in three months last week and was greeted with lengthy queues. It has said previously that store closures would cost it about £650 million.
The fashion chain refused to pay some landlords its March quarterly rent. It is understood to have told landlords it will pay June’s quarterly bills only if they can come to an agreement on how much should be owed for the period when stores were shut.