VAT hike on the cards post-election
A VAT increase is on the cards post-election, regardless of the outcome, according to experts.
Seen as the most efficient way to raise tax quickly, hiking VAT to 19% would bring an additional £8 billion into the treasury coffers, according to Azad Zangana, European economist at Schroders Investment Management.
“We assume the increase will be pre-announced in order to generate a boost in demand, and in order to avoid further distortions in the year-on-year measure,” says Zangana.
For this reason, he predicts the increase will come into effect from January 2011, one year after the 17.5% rate was reintroduced.
George Bull, head of tax at Baker Tilly, agrees tax increases are inevitable and thinks with the UK’s deficit sitting at over £160 billion, the standard rate of VAT will be increased to 20% within the next 12 months.
“To sweeten the pill, we might well see an extension of the goods and services included in the reduced rate band,” he adds.
The reduced rate band is currently set at 5% and covers items such as domestic fuel and power, the installation of energy saving materials in domestic properties and sanitary hygiene products. There is also a nil-rate band, which includes children’s clothes and some foods.
Bull predicts the reduced rate could rise to 8% and expand to include other products and services to soften the blow for businesses.
Crucially, none of the major parties have ruled out an increase in VAT, focusing the policy debate on national insurance instead.
“For reasons best known to itself, the Labour government decided to announce increases in national insurance not VAT. This could be because national insurance is thought to be somewhat invisible, whereas VAT is very high profile,” says Bull.
A hike in VAT is also said to affect lower income households more because it eats up a larger proportion of their disposable income.
In the latest polls from YouGov, the Conservative party leads with 33%, Labour are in second place with 29% and the Liberal Democrats are in third with 28%.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.