VAT hike likely to be 'permanent'
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Prime Minister David Cameron has suggested that January's VAT rise, which saw the tax increased from 17.5% to 20%, is unlikely to be reversed as pressures to slash the deficit persist.
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In a television interview with the BBC, Cameron said that the measures the government has had to introduce to tackle the budget deficit would have to be 'pretty permanent'. However, in a sop to wealthier voters, he said he would aim to scrap the 50% top rate of income tax.
The government is anticipating that its decision to increase VAT will raise £13 billion a year, however there are concerns that as pressures on household budgets continue to rise it will hit retail sales.
The British Retail Consortium claims nearly two-thirds of retailers expect sales to fall in 2011 as consumers tighten their purse strings.
Indeed, according to Moneywise.co.uk's latest poll, 47% of people say the hike will curb their everyday spending, while 32% say it will make them think twice about making larger purchases. Only 21% say that the extra cost is minimal.
Labour, which temporarily reduced the rate of VAT to 15% in 2010 to stimulate the economy, claims it would not increase the tax because it hits the poorest hardest. Instead it says it would tackle the deficit by increasing national insurance contributions by 1% for both employers and their staff.
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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.