Chancellor Plans To Reduce VAT From 20% To 17.5%

I’ve been away from the news for the last 24 hours or so, but even this was a surprise to me. Chancellor Philip Hammond is set to reduce VAT from 20% to 17.5%. Not this Autumn Statement though. It’s most likely to happen in the Spring 2017 Budget. According to reports, he is going to give hints of that action during the Autumn Statement on the 23rd of this week.

As we head into uncertain times, a move like this will be welcomed in the window industry. So what could it mean for us?

Measure described as “temporary”

The media is reporting that the speculated 2.5% drop in VAT will be a temporary measure, designed to create £12bn in tax breaks, hoping to boost consumer spending across the board. If I remember correctly, the rise to 20% was temporary, but look at how long that has lasted.

Still, whether it’s small every day items or big ticket items like windows and doors, a 2.5% drop is going to be welcome relief to everyone. On a house full of windows and doors that costs £10,000, that’s a £250 reduction. On a big spend like that, a few hundred pounds off is a decent sweetener to any home owner.

What we hope as an industry is that home owners currently sitting on quotes or even just thinking about getting quotes for new windows and doors will be encouraged to make a positive move towards getting that work done.

Not quite 5% VAT

Any drop in VAT will of course be welcome. However, it’s still only a small step towards what should be our industry’s main goal of achieving 5% VAT on our products.

It is largely accepted that a drop to 5% VAT on windows and doors would actually generate enough business to more than cover the reduction in tax collected by the Treasury. It doesn’t take a committee to know that home owners in their droves will put new windows and doors higher up the list of things to get sorted in the house if they suddenly became 15% cheaper.

There is though an interesting dynamic coming up when it comes to VAT on our products. At the end of last year, the Government started a consultation on which product actually qualified for 5% VAT. The European Commission ruled that the UK Government had not applied it’s ruling on what constitutes a product for 5% VAT properly, instructing that our Government looks at it again. Hence the consultation.

Click here to read my analysis of the ruling

However, we are now leaving the EU. In a few years, their laws will not apply to us. So will the UK Government continue with it’s consultation? Will they drag it out so long that it expires after we’ve left?

My personal hope is that the consultation is concluded soon. They decide that windows and doors should have been applicable for 5% VAT from the start, and they introduce new legislation that rectifies the situation. My belief however is that they won’t. A 15% reduction on tax revenues from an industry that’s worth £5bn a year to the UK economy is a big chunk to swallow. Until they see concrete evidence to prove that the drop will generate demand that will outstrip the losses, it won’t happen. I also believe that they probably won’t even push for any reports commissioning to find such evidence.

I think that come Spring 2017, we’ll probably have to made do with the 2.5% drop.