Under EU rules, no member country can reduce its rate of VAT on goods and services below 15%. This means that currently, it is the UK government’s policy to set the rate at 20%, and the government could lower this by up to 5% if it so desired.
The EU will allow reduced rates of down to 5% on specific goods such as domestic fuel bills. UK VAT on fuel bills is 5%, so the government is currently unable to lower this tax due to EU rules. A rate of 0% is within EU rules only for those products taxed at 0% before and since 1991.
Outside the EU the government would have the option of lowering VAT below the EU’s minimum levels, but of course this would depend on a whole host of other variables and there could be no guarantee as to the government’s decisions. Total VAT revenue is expected to be £120 billion in 2015/16, so the government would potentially lose £6 billion for each 1% reduction in VAT. Reform of VAT regulation is currently under discussion within the EU. One option would give more power over VAT to member countries by reviewing and expanding the list of 5% and 0% products on a regular basis. Another option would give countries full powers to lower VAT as they wish, but only where it would not create tax distortions in the single market. There currently is no timetable or deadline for these discussions however, and the proposal would ultimately require the unanimous vote of all 28 member nations.