A lower VAT rate to tackle price spikes?

In response to the challenges that pet parents are facing due to inflation, national pet food manufacturers’ associations are calling on governments to consider a temporary reduction of the value-added tax (VAT) on pet supplies. They claim that pet food should not be treated as a luxury item.

Illogical in Italy

According to Italy’s Association for Pet Feeding and Care (ASSALCO), inflation has hit pet food sales the hardest where distribution channels showed more growth in value than in volume. Pet food sales in grocery stores – the country’s largest distribution channel – increased by 14% in value but only 0.4% in volume last year.

“It is illogical to impose 22% VAT on pet food and vet care, the same rate that applies to luxury goods,” says ASSALCO’s President Giorgio Massoni. Back in 2020, ASSALCO and the National Association of Italian Veterinarians (ANMVI) sent a letter to the Italian government asking for a long-term reduction in the VAT rate from 22% to 10% for pet food products, pet services and medicines.

An everyday essential in Germany

In Germany, pet food is considered an everyday consumer good and a VAT rate of 7% currently applies with the aim of reducing prices for the end consumer. The industry is keen to keep this reduced tax rate in place for pet supplies.

The German Pet Trade & Industry Association (ZZF) believes that pet food is an essential item. It warns that a higher VAT rate would make pet owners more likely to switch to feeding their pets more table scraps and homemade food.

Reluctance from policymakers

In Belgium, a recent proposal is calling to reduce the VAT on pet food from the current 21% to 6%. The federal government acknowledged that the cost of keeping pets had increased, but warned that a VAT reduction would benefit businesses rather than citizens.

“Pet parents will experience only a very small decrease in costs, while it will impose a heavy budgetary cost on the Federal Government,” says Belgium’s Deputy Prime Minister Vincent Van Quickenborne in response to a letter from animal rights organization GAIA.

Meanwhile, in France, the Federation of Food Manufacturers for dogs, cats, birds and other pets (FACCO) proposed that the VAT rate on pet food should be lowered from the current 20% to 5.5%. However, the proposal, registered as part of the 2023’s Finance Bill, was rejected in the Senate. Cutting the VAT on pet food products would have meant a loss of €420 million ($459M) in revenue for the nation’s finances.

The association now hopes to work on what it describes as the “best approach to resubmit the request within the framework of the Finance Bill for 2024”, which will be discussed and approved by the end of this year. FACCO regards the issue as “more central than ever” and says that a reduction of the tax applied to pet food would help households cope with inflation.

Request falls on deaf ears in the UK

In April 2022, the UK welfare charity Dog’s Trust asked the Chancellor of the Exchequer to remove VAT on veterinary services – including medicines – and pet food for a temporary period of 12 months. The letter, which was signed by 7 organizations, urged: “Removing the 20% VAT on pet food and veterinary- services costs could be critical to many pet owners at a time when interest rates as well as costs for energy, food and fuel have all rapidly increased.” However, according to Nicole Paley, Deputy Chief Executive of UK Pet Food, the government showed no signs of revisiting VAT applied to pet food.

What is the real impact?

Experts agree that the impact of a tax reduction could be beneficial for pet parents in theory, but the reality might be different. James Hoverd, VAT associate at RSM UK, warns that businesses are also feeling the impact of the rising cost of living and high inflation, so pet food manufacturers and retailers could decide to use a reduction in VAT to increase their own revenue rather than passing the benefits onto shoppers.

“If the manufacturers and/or suppliers of the pet food choose to keep the same price even though there has been a reduction in the rate of VAT, then there would be little benefit to end consumers. The result could therefore be that end customers would continue to pay the same purchase price, even if the applicable VAT rate was reduced,” he explains in an interview with PETS International.

The cost to public finances

Since April 2022, EU member states have been allowed to apply a reduced rate of VAT – as little as 5% or even the zero rate – to pet food products, as they are considered products that cover basic needs. But as Hoverd points out, any changes in the VAT rate must be thought about carefully: “This will include consideration of the complexity in implementing the legislation, as well as the potential loss of tax revenue in the case of applying a lower taxable VAT rate to goods.”

The European pet food market is currently worth around €39 billion ($42.6B). Therefore, a reduction of the VAT rate for pet food to between 5% and 0% would suggest a cost to public finances of between €6.2 ($6.75) and €8.1 billion ($8.85B).

How long is ‘temporary’?

Moreover, it is not clear for how long these temporary VAT reduction measures should remain in place. Nevertheless, there is a general consensus that they should last for a significant period of time. According to Hoverd, this allows for the benefits to “properly flow through the supply chains and be passed on to end customers”.

“If a reduction to the rate of VAT on pet food is intended to support consumers through the current cost-of-living crisis, then a reasonable timeframe would appear to be one that aligns to expectations for when inflation and the economy will return to a more stable state,” he concludes.