VAT – the world’s COVID tax

How COVID-19 accelerated VAT as the global tax of choice.

Value Added Tax (VAT), Goods and Services Tax (GST) and U.S. sales tax have emerged since the 2008 financial crisis as the world’s favourite taxes. There are good reasons why they have been implemented by 170 countries from a standing start 60 years ago: 

• It’s simple; Difficult to avoid;
• Cheap to administer (thank you unpaid tax-collecting businesses!); 
• And most importantly, they are levies on consumption rather than wealth-generating personal and business income taxes.

But the COVID-19 crisis has reminded the world of the number one reason why it is the modern tax of our digitised 21st Century. Speed. 

Since VAT is calculated live and paid back to governments within weeks, and changes to rates or remittance dates can give overnight support to nervous consumers and hard-hit businesses. Whether it’s across the board VAT cuts, or targeted sectorial support, the love affair with VAT has deepened to new levels.

The VAT-COVID lifecycle

Since the coronavirus pandemic took hold at the start of 2020, governments have swiftly rolled out a range of VAT measures, carefully timed to the different stages of the pandemic. 

1. Emergency: Reacting to the overnight lockdown and sudden drop in turnover, an immediate suspension of VAT payments, including clear repayment schedules. This is accompanied by the suspension of fines or late interest charges. A pause on audits and any assessments of VAT or GST liabilities.
2. Containment: Keeping the economy on life support during the lockdown. This includes continuing refinements and rollovers to the initial emergency VAT payments or filings suspensions. Many paper-based rules are also suspended, reflecting long absences from offices. This includes electronic and PDF copies of invoices. Many reliefs reflecting the liquidity crunch are applied, including speed VAT refunds on bad debts.
3. Recovery: Stimulus to accelerate the re-start of consumer and business economic activity as the lockdown is eased. This includes temporary wholesale VAT cuts, for example Germany cutting VAT to 16% and Ireland reducing VAT to 21% in 2020.  Or cuts in reduced rates for severely hit sectors like hospitality and tourism – see Greece, Belgium, Czech Republic, Colombia and the U.K.
4. Fiscal Consolidation: The long journey to paying down the massive expansion of government health and welfare crisis debts. The heavy lifting on this will fall to taxes like VAT. Another round of austerity after the last decades is off the table given the continuing health and welfare costs of a seemingly prolonged pandemic. As billions of pounds are at stake, there will have to be a wholescale re-imagining of tax policy. Saudi Arabia went early on tax hikes raising VAT to 15%. Europe can expect an average 25% VAT rate; Asia 20%. Untaxed financial services will undergo a rethink, with countries like China and Australia, which both charge VAT/GST on banking and insurance, showing the way.

VAT has burnished its credentials as the crisis tax during COVID-19. The few countries that do not have the regime have confirmed accelerated plans to introduce it. Oman will implement VAT in early 2021. 

What next for VAT? It needs some reforms if it is to realise its full potential as a simple and efficient tax. These will include; broadening the tax base; fairer credits; and automation to improve the fight against fraud. These will come into debate in 2021 and beyond, as  countries look to strengthen their best fiscal friend.