Coalition agreement 2021-2025: VAT and transfer tax

No major VAT plans are in the pipeline, although the coalition wants to explore a zero rate on fruit and vegetables. Transfer tax is going up again.

VAT

There are no major VAT plans in the pipeline. The coalition does want to look at whether a sugar tax can be introduced in time and whether the VAT on fruit and vegetables can be reduced to 0%.

But is that reduction wise? Using tax to encourage sales of fruit and vegetables only has the desired effect where the benefit reaches the consumer. As far as we are aware, there is no academic research showing that reducing the rate on particular foodstuffs causes prices to fall by the same amount. There is therefore a real risk that a zero rate leads to little or no price reduction, and instead to a larger margin for the businesses selling the produce.

A zero rate also inevitably creates questions of scope. Does a beetroot wrap count as a vegetable? That sits awkwardly, in our view, with the coalition's wish to simplify tax legislation during this parliamentary term.

Transfer tax

Transfer tax is set to rise once more. The coalition intends to increase the general rate from 8% to 9% on 1 January 2023. The reduced rate of 2% for homes the acquirer occupies as their main residence is left untouched.

In our view it would be worth looking critically at both the first-time buyer exemption and the reduced rate for homes. These exceptions are extremely complex, and doubts about their effectiveness were being raised even before they took effect. Given the wish to simplify the legislation, it might be better to scrap those exceptions and return to a single uniform rate for all immovable property, rather than raising the general rate.