VAT hike on the cards post-election

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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%.