The chancellor has been urged to take a "radical and targeted approach" to VAT in next week's Budget to help hospitality operators cope with the recession.
While last December's 2.5 point percentage cut to 15% has proved to be a costly initiative that has done little to stimulate demand, there are some VAT options which could help both consumers and businesses, according to consultancy KPMG.
For example, it said, the 27 EU Member States recently agreed that there should be an option for governments to apply a significantly reduced VAT rate of 5% to certain labour-intensive services, including the supply of restaurant and catering services.
Amanda Tickel, tax partner at KPMG, said: "Restaurants and pubs are feeling the squeeze from reduced consumer spending.
"This significant VAT reduction would legally give them two options; hand part of all of the reduction on to consumers to help drive demand through reduced prices, or use the tax saving to support their margins and stave off other cost cutting measures like redundancies."
KPMG also called on the chancellor to waive the default surcharge for late VAT payments arising out of the credit crunch problems and charge interest instead.
The current default surcharge is a flat 2, 5, 10 or 15% of the late VAT, depending on how many late payments have been made, which can prove to be far higher than the current standard rate of 0.5%.
"Recognising credit crunch difficulties as a reasonable excuse for late VAT payments would be a way for the government to show flexibility in support of all business," Tickel said.
Finally, KPMG said the chancellor should look at the regime that requires large VAT payers with an annual liability in excess of £2m to pay 1/24th of their estimated annual liability to HMRC in the second and third months of the VAT quarter, with a balancing payment submitted with the return at the end of the quarter.
"Having to make these up-front VAT payments increases the pressure for larger companies trying to manage cash, compared with smaller businesses who are allowed to pay VAT quarterly in arrears," Tickel said.
"Temporarily removing the Payment on Account regime would allow struggling businesses some very welcome breathing space."
By Daniel Thomas
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