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UK Cuts VAT, Stamp Duty To Ease Virus's Economic Effect

By Matt Thompson · July 8, 2020, 3:20 PM EDT

U.K. Chancellor of the Exchequer Rishi Sunak announced two temporary tax breaks Wednesday in what was billed as a minibudget to help mitigate the economic impact of the coronavirus pandemic.

Stamp duty, a tax on buying houses, will be temporarily suspended on properties worth up to £500,000 ($631,000) until March 31, 2021, said Sunak, who serves as the head of HM Treasury. He also said value-added tax will be temporarily reduced from 20% to 5% for the tourism and hospitality sectors until Jan. 5, 2021.

The measures were announced in Parliament as part of a package designed to help struggling sectors of the economy.

While the VAT cut can be seen as a direct subsidy for an industry that has been unable to operate due to the pandemic, the stamp duty cut is being seen as a way of boosting the housing market, as the price of houses in the U.K. is often closely tied to consumer confidence.

"The chancellor's announcement on stamp duty should give a welcome boost to the housing market and in turn have positive knock-on effects for the wider economy," said Eric Leenders, managing director of personal finance at UK Finance, a trade association for the country's banking and financial services sector.

The U.K. Office for Budget Responsibility said £120 billion has been spent so far on economic measures to combat the effects of the pandemic, such as paying wages to workers who can't work due to the country's lockdown.

The VAT cut will cost an additional £4.5 billion and the stamp duty cut will cost £3.8 billion. The total cost of the new measures announced Wednesday is around £30 billion, according to HM Treasury.

Commenting on Wednesday's budget, the Institute for Fiscal Studies' director, Paul Johnson, said more support might be necessary in the autumn budget.

"More support may well need to be announced in the autumn when we know more about the path of the virus and of the economy, but this was another big package from the chancellor," Johnson said.

The hospitality sector has long been campaigning for a cut in its VAT rate — for example, to help pubs compete with cheap alcohol sold in supermarkets.

"It is a shame that it has taken the economic damage of COVID-19 to produce a temporary tax cut," said Jon Stevens, tax partner at DWF, the British law firm.

Tom Selby, senior analyst at the investment service AJ Bell, said that while Wednesday's announcements were designed to further boost demand in the economy, at some point the government will have to attempt to claw back the estimated £300 billion shortfall the combined effects of the pandemic have caused for the public purse.

Since the government has ruled out a "return to austerity," Selby said, "a tax grab seems almost inevitable as the Treasury seeks to balance the books." 

HM Treasury didn't immediately respond to a request for comment.

--Editing by Robert Rudinger.

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