The government had intended to levy 20% VAT on hot takeaway foods – the so-called pasty-tax – which proved controversial and attracted criticism over the detail of what equated to "hot" food. At the time the move was estimated raise an extra £125m this year and £350m a year by 2016.
New plans announced today will mean food that is cooked on-site and then left to cool will not be eligible for VAT. But food that is kept hot or re-heated will be liable for the tax.
The UK’s largest bakery chain Greggs, which led a campaign against the tax, welcomed today’s changes and saw an 8% rise in share prices after the government announcement.
Changes today will also be made on static caravan VAT levels, to revise the measures announced in the Budget in March.
Following widespread opposition from MPs, static caravans will now only be charged VAT at 5%, rather than 20%. The 5% charge will also be delayed until next year. Static caravans do not currently incur VAT charges.
Chris Morgan, head of tax policy at KPMG in the UK, said: “Today’s news of a rethink on the ‘pasty-tax’ and ‘caravan-tax’ is welcome. It suggests that the government is genuinely committed to listening to views raised during the consultation process on proposed tax changes.
“We very much hope that policy-makers will be similarly open to hearing the concerns being raised about the impact of proposed changes to gift-aid on charitable giving and prepared to consider also amending these proposals as a result.”
Frank Haskew, ICAEW head of Tax Faculty, said, “We are pleased that the government has listened to the many concerns expressed by ICAEW and others. While we understand the government’s underlying policy to try and simplify the VAT rules on take-away food and remove existing anomalies, we believe the pasty tax was unworkable in practice.
“We were particularly concerned that the estimate of the implementation costs as set out in the impact assessment were far too low.
“In the current economic climate, it is essential that any tax changes are cost effective to implement. All measures should be supported by robust and credible impact assessments that measure the true compliance costs to UK businesses. We therefore welcome this development and hope government will take the same pragmatic and sensible approach when assessing the impact of some of the other proposed VAT changes, where similar concerns arise about the real compliance costs.”
The changes announced today will cost the Treasury an estimated £40m, and concerns have been raised that the costs will be recouped elsewhere.
George Bull, senior tax partner at Baker Tilly said: “We welcome common sense prevailing on the headline-grabbing pasty and caravan taxes. These taxes would have created an even greater burden for British businesses as well as for the overstretched local consumer.
“At a time when the economy needs as much support as it can get, I’m delighted to see that common sense has prevailed.
“However, this could mean that the UK faces a further VAT increase later this year. With income tax and National Insurance, VAT is one of the “big three” revenue-raisers for the UK Exchequer.
“With no upper limit on the standard rate of VAT, the autumn Budget may announce an increase to the current rate of 20%, as recommended by the IMF.”
The Labour party has condemned the way the coalition has approached these tax changes and labelled them a "total shambles."