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


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.’

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