VAT increases is the ‘odds on favourite’ for raising revenue

Speculation that the standard rate of VAT will be raised is gathering pace
ahead of the Treasury’s release of the Pre-Budget Report (PBR).

The government’s autumn tax statement is expected in the next few weeks, and
with options limited, a VAT hike could be on the cards.

A recent move by the Irish government to increase its standard rate of VAT by
0.5% has only fuelled hype that a similar strategy will be adopted by the UK.

According to Marc Welby, VAT partner at BDO Stoy Hayward, much of the
conjecture centres on chancellor Alistair Darling leaving himself with little
choice but to either increase the rate or reduce public expenditure.

Any increase, however marginal, he said, would undermine current government
objectives and instead stifle demand.

‘If we are going into a deflationary cycle the last thing we want is for
savings to be hoarded… an increase in VAT would be a disincentive to spend,’
said Welby.

Richard Mannion, national tax director at Smith and Williamson, believes any
increase in the standard rate of VAT is the most plausible option for the

‘It’s number one on my list. It’s odds on favourite,’ he said.

Mannion points to the Irish government’s abolition and subsequent reversal of
free health care for the over-70s. The climbdown has now shifted the focus to
other means for revenue raising.

He said there is a growing acceptance that in troubled times the public are
prepared to pay more and that it is certainly the case in Ireland.

Smith and Williamson estimated that if the UK government were to increase the
rate by 0.5% – taking it from 17.5% to 18% – it would generate £2.5bn for the

‘It is a good sum but I’m sure they’d need to raise more than that,’ he said.

Ireland announced its VAT hike, from 21% to 21.5%, as part of the annual
budget release.

At the time of the announcement, Richard Asquith, head of TMF VAT global
compliance service, said he expects other countries to follow suit as the
international trend sees a shift from business taxes to indirect taxes.

The real question is whether the chancellor decides to raise tax at all. He
may decide that a borrowing splurge is the only space to get through a downturn,
but VAT moves currently look the most likely revenue raising option.

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