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UK VAT Set To Rise

Tuesday, February 16, 2010

It seems that whoever wins the forthcoming general election in the UK, taxes are going to have to rise to help narrow the GBP180bn budget deficit and reduce mounting public debt, and the main political parties are targeting an increase in the rate of value-added tax (VAT) as possibly the most painless revenue raiser.

While the governing Labour party and the main opposition Conservatives are unlikely to dare suggest that income tax will have to rise with an election so close (Britain is expected to go to the polls in May, and the election must be held no later than June), the billions of pounds that could be raised through an increase in VAT by a couple of percentage points or so makes this an obvious target.

Indeed, according to The Times, both parties are actively considering this as an option after the election. It is suggested that VAT, currently 17.5%, could rise to 20% - much nearer to the European Union average - in a move that could raise an additional GBP13bn per year.

The paper cited a source close to the Tories who said that there is a growing consensus within the party's ranks that VAT will have to go up. Meanwhile, Chancellor Alistair Darling, by ruling out an increase in the scope of VAT and further increases in income tax, has left the door open to an increase in the main VAT rate.

Unsurprisingly, the report has led to denials by the Tories that they are considering a VAT increase, and a party spokesman told Reuters that the party has "absolutely no plans" to do this.

Shadow Business Secretary Ken Clarke was characteristically more candid however, telling The Times that the Tories are being deliberately "vague" on tax in the run up to the election "because we don't like them."

Clarke, one of the few members of the Conservative front bench team with experience of government, warned that the next government faces the toughest fiscal challenge in living memory. He argued that the next government would have no choice but to ruthlessly cut public spending and consider all revenues.

"We are going to have to be much tougher on public spending than Margaret Thatcher ever was," he said.