VAT hike may be a medium-term option, says PwC

A VAT rise to 20% could be used as a move to boost the UK's tax revenues in the medium-term, but taxing fat cats would not be advisable, PwC has said.

The traditional cash cows of income tax-which include City bonuses-VAT and corporation tax receipts have shrunk, which may cause the Treasury to start thinking about take steps to make up the shortfall.

In a pre Budget Report briefing, John Whiting, tax partner at the firm said: 'If the Chancellor's sole aim was to balance his books, then tax increases could be anticipated. However, with the economy teetering on the brink of a recession, as discussed above, general economic wisdom is that this is not the time to raise taxes. If anything, the economy needs a stimulus, not the squeezing that is implied by increasing taxes.

But if the Treasury is beginning to contemplate that taxes may have to go up in the medium-term, and if the Chancellor does want to raise more money, now or at some stage in the future, the choices are probably as follows: VAT – increasing the standard rate of VAT from 17.5% to 20% would bring in something in the order of £12bn a year.

'A rate of 20% would not be in any way excessive: Germany for example, has recently raised its standard rate to 19% and Ireland's recent Budget raised its rate from 21% to 21.5%. The downside is that VAT rises tend to hurt the less well off more than the better off, though the answer to that could be increases in tax credits.'

A 1% rise in income tax could bring in an extra £4bn a year, and Whiting said 'we could well see above inflation duty rises pencilled in for alcohol and
tobacco.'

However Whiting warned against hitting City bonuses harder.

There has been speculation about some form of taxation on bonuses, or windfall taxes. Surely, both of these can be dismissed. If it ever was appropriate to tax bonuses more heavily than normal income (and bear in mind that there was in any event an effective tax rate of 53.8% on them) that time has surely passed.

'As for windfall taxes, these are profoundly damaging to the reputation for stability and fair dealing for an economy. If there is any suggestion that the oil companies should be subjected to some sort of windfall levy, then issues will arise over its definition and also the fact that such a tax would do little to encourage continued investment by oil companies – something which, fundamentally, the government needs.'