The VAT increase announced in today’s Budget is expected by the Government to raise around £13 billion per year by the end of the current parliament.
The measure – which will see the standard rate of the tax go up to 20% on 4 January 2011 – has been applauded by many tax experts for allowing the Treasury to avoid making greater demands on payers of income tax.
‘This shift from income tax to VAT echoes the policies of many other governments in Europe, as well as recommendations from the OECD [Organisation for Economic Co-operation and Development],' said Audrey Fearing of Ernst & Young.
‘Many will be relieved that the Chancellor did not address the much-valued list of favoured items, such as food, children’s clothes and books.’
PricewaterhouseCoopers’ Christine Cross said scheduling the VAT increase for next January was ‘sensible as it gives retailers time to respond in a measured way, which is bound to be better for consumers in the medium term. In the short term, it is likely to fuel some spending by consumers during the rest of 2010.’
On the subject of the retail sector, Richard Baxter of Alvarez & Marsal Taxand remarked, ‘The winners will be the strongest and best-placed retailers who will gain market share and increase power over their supply base. Weaker retailers may struggle to absorb this rise and… this could be the straw that breaks the camel’s back.’
Lorraine Parkin of Grant Thornton said some businesses will have concerns about the administrative costs of having to adapt to a VAT rate change.
'Those that cannot recover all the VAT they incur will be hit hardest as the increase will represent a real increase in their operating costs,' she said. 'Even those that can fully recover the VAT incurred on eligible costs will need to be aware of the cash flow implications if they have to pay their suppliers before the tax can be recovered from HMRC.'
BDO’s Marc Welby turned his gaze to the public sector: ‘It will be interesting to see what the new Government does to NHS spending as the VAT increase will impact the amount of real cash there is to spend on frontline services.’
Not all commentators were positive about the Chancellor’s measure, which – having been the subject of much rumour and conjecture – will bring the UK’s rate of sales tax up to the European average.
The rise ‘will take much needed spending power out of the economy,’ insisted TUC general secretary Brendan barber, who added that high-earners ‘will hardly notice the VAT increase’, while the lower paid will be more greatly affected.
