Budget 2010: VAT rise ‘on hold until after election’

Despite chancellor Alistair Darling saying he had “no further announcements about VAT” in this week’s Budget, there are many in the accountancy profession who expect such an announcement to be made in just a few short weeks.

They expect that an increase in VAT to 20% has been merely delayed for political purposes until after the general election, which is almost certain to be held in early May.

According to Richard Woolich, tax partner at DLA Piper UK LLP, the Budget contained “no great surprises from the tax point of view” before the upcoming election.

He said: “We must wait for the post-election Budget, or more likely next year, for the really hard-hitting changes.

“VAT is likely to rise to 20%, which is the EU average.”

John Voyez, VAT director at Smith & Williamson, agreed with this analysis.

“Many in the profession are expecting a hike in VAT,” he said. “A 1% hike in VAT brings in around £4.5bn to £5bn in tax receipts. As the average VAT standard rate in the EU is around 20%, you’d think it would be a no-brainer to raise it.”

However while Voyez noted that a 2.5% rise in the standard rate of VAT to 20% would “easily raise £12bn for the Treasury,” he admitted that the current fragile economic recovery should be taken into account.

“A rise in the VAT rate could impact inflation and the cost of living,” he said.

“If whichever party is in government is trying to kickstart the economy, a rise to 20% may not be such a good idea, but a smaller rate rise could work. I’ll be surprised if the standard rate remains at 17.5% beyond this autumn.”

IN OUR VIEW

Historically, Labour governments have been averse to raising VAT rates and this trend continues. The Chancellor also knows that, given the fragile economic recover y and a highly taxed populace, a VAT hike would be unpopular before an election. However, given that a mere 1% increase raises around £5bn for the Treasury coffers, a hike will be useful.