In Our Opinion

Deferring a VAT Increase: ‘Delaying The Inevitable’ Say Liverpool Accountants

Chancellor Darling cut VAT to 15% in December 2008 to boost the economy and has insisted it will return to 17.5% on 1 January 2010. Retailers and business groups are pressurising him to postpone the increase.

David Kirby, head of tax at Wilson Henry LLP, Chartered Accountants and Tax Specialists says “Many would argue that the VAT reduction was folly in the first place. The benefit to the economy of allowing business to retain or pass on VAT savings of as miniscule an amount as £1.85 for every £100 spent, when weighed against the costs of implementing price reductions, was never going to give rise to any great economic stimulus. The fact is that whichever colour of government is elected next year, they will need to raise taxes. It is only a question of which taxes, how much and when. Pushing back a VAT increase any time beyond early next is delaying the inevitable.”

The double digit percentage decline in tax receipts this year, compared to last, has been alarming but is an obvious consequence of lower business profits and reduced payroll taxes occasioned by the sharpest recession in living memory.

The UK’s VAT rate is among the lowest in Europe. The cost of the current temporary cut has been £12.5 billion. Economists predict that a VAT hike to 20% would raise £20 billion over the next four years.

Mr. Kirby concludes: “The dilemma facing our politicians is whether merely restoring the VAT rate to its former level will be anything like enough, whilst at the same time avoiding policies that could fuel stratospheric inflation or excessively dampen consumer spend.”