Tax pros and unions say no to VAT rise

Tax professionals and trade unions have found themselves in agreement on the much-discussed prospect of a VAT increase in next week’s Budget.

According to a survey by accountancy giant KPMG, almost two-thirds (61%) of chief executives believe a higher standard rate of VAT would be the best option should the Chancellor decide to raise taxes in any way.

But such a measure would miss the point of the potential impact on the economy of a VAT increase, said tax experts at the Big Four accountancy group, which warned that a 20% rate, the European average, could stifle consumer spending and cost the average household £425 a year – although, based on current spending patterns, £1 billion would find its way into government coffers each month.

KMPG’s UK head of national markets, Malcolm Edge, said: ‘VAT is seen as the lesser of the tax evils because it is an indirect tax paid by consumers. So, to a certain extent, it's a wash-through for companies operating in a predominantly business-to-business environment.

‘However, for those operating in more business-to-consumer markets, such as retail, financial services, hospitality and consumer goods, it can be far more significant because increases in VAT are either passed on to the consumer, putting the end prices up, or they are absorbed by the suppliers at the cost of squeezing their margins.’

So far, the coalition Government has neither confirmed nor denied that VAT will be put up in the so-called emergency Budget on 22 June. An increase would hit the poor, cost small firms, threaten retail jobs, increase tax avoidance and boost inflation, the Trades Union Congress (TUC) has predicted.

The organisation said that while tax increases should play a significant part in deficit reduction, VAT would be one of the least progressive ways by which to achieve the aim of a stronger economy, because the poorest fifth of households spend twice as much of their disposable income on VAT as the richest fifth – and businesses with sales of more than £70,000 a year register for VAT while unregistered small firms pay the tax without being able to claim it back.

The TUC claimed that, unlike small firms, large companies avoid VAT by setting up subsidiaries in tax havens because items costing less than £18 can be imported into the UK free of the tax.

Increasing VAT would feed directly through to inflation, and banks could increase interest rates as a result, which would lead to higher borrowing costs for companies and bigger mortgage bills for consumers, according to a briefing from the trade union body.

‘The only VAT change the Chancellor should contemplate is ending the zero rates on private healthcare and education,’ said general secretary Brendan Barber.

Categories: News , Budget 2010 , VAT