VAT rise predicted for emergency Budget Tax could increase to 20%

19 June 2010

Despite official denials, many commentators see a VAT hike as a strong possibility in next week's emergency Budget. It has also been suggested that the tax might be extended to some items that are currently zero-rated. 

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Value added tax raised £67bn last year. It has been estimated that a 1% increase, from 17.5% to 18.5%, would generate an extra £4.65bn. A rise to 20% could boost government revenue by as much as £12bn. 

Previous VAT rises

When VAT was introduced in Britain in 1973 it was at a standard rate of 10%. In 1979 this rose to 15% however, and it went up again in 1991 to 17.5%. There was a temporary reduction in 2009, to 15%, but the previous government restored the 17.5% rate in January 2010. 

Many other countries in the EU already have a higher rate. In Germany and Holland it is 19%, in Italy it is 20%, while in Denmark and Hungary it is 25%.

Zero-rated for VAT    

In the UK, many items escape VAT by being zero-rated. These include children's clothes and shoes; basic foodstuffs, such as meat and poultry, fish, fruit and vegetables; books and newspapers. Odd exceptions, such as fruit juice, ice cream and liqueur chocolates are already taxed at the standard rate.       

Retailers' warning

Retailers have warned that an increase in VAT could damage Britain's economic recovery. The British Retail Consortium has predicted that consumer spending could fall by £3.6bn over a 12-month period if VAT was increased by 2.5%. The trade body warned that this could give rise to 30,000 job cuts. 

Commenting on suggestions that standard-rate VAT could be levied on items that are currently zero-rated, Tesco's Finance Director, Laurie McIlwee, said: 'I fear the plan is VAT on food'. Sainsbury's Chief Executive, Justin King, has also commented on this possibility, observing that: 'VAT on food is a very regressive tax'. He warned that such a move could drive up inflation by as much as 1.5%.

A recent survey of UK business leaders, conducted by consultants KPMG, found that putting up VAT was favoured above other possible tax rises however, with 61% of those polled identifying it as the 'best option', ahead of a hike in income tax, corporation tax or National Insurance contributions, which was seen as the 'worst'.

Other taxes tipped to rise in the emergency Budget   

The Coalition government has pledged to reduce Britain's £156bn deficit through a combination of spending cuts and tax increases. Although a VAT increase has been widely discussed, the government is also expected to raise Capital gains tax and reduce pension tax relief for higher earners. 

Emergency Budget

Chancellor of the Exchequer George Osborne will deliver the government’s emergency Budget on Tuesday 22 June, and you can follow his speech as it happens on the Which? Money 2010 emergency Budget liveblog.

Sign up now for an email reminder to join us for the Chancellor's budget speech, and come back to on the day to get the Which? Money take on the budget and to add your questions and comments.

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