Before the recent election all the three main parties were saying that they “had no plans to increase or extend VAT”. In fact the Labour Party actually ruled it out, but then they knew full well that the chance of them being in power, even with Lib Dem support, was fairly negligible. So it proved.

Of course having no plans to increase VAT doesn’t mean that it won’t be raised. Indeed virtually every economic and political pundit has said that whatever government takes office; they will have no option other than to raise VAT. The only question is will it be 20% or will it be 19% – the latter figure only on the basis that psychologically it sounds better.

Every 1% increase in VAT will raise between £4 and £5 billion for the Treasury and in the present economic mess left by the outgoing government what Chancellor can resist this sum, equivalent to a rise of 3% on income tax.

But what effect would the rate rise have on the economy? The general feeling is that it will have little effect. At 20% it will still be the third lowest rate in the EU and still less than the average. In the last 18 months we have seen two changes to the VAT rate, first down to 15% and then back up to 17.5%. Both such changes had an almost immediate impact on the Government’s tax receipts but made little difference to sales.

The alternative option being touted is for VAT to be extended to other items such as food, children’s clothes and books. This I feel is less likely though it is possible that a lower increased in the standard rate might be introduced along with an extension to some items at a lower rate.

Either way I think the public are going to have to prepare themselves to be hit in the pocket sooner rather than later.

Also See:

Category: Taxation

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