Adding Value

The rumour mill has, since the election, been in high gear on the prospect of tax rises, and favourite for those fancying a flutter has been Value Added Tax (VAT), on which the Tories have previous.

VAT first appeared in the early 1970s, on the watch of Sailor Heath, as a more or less straight replacement for Purchase Tax, and was levied at a rate of 10%, which the following Labour Government amended to 8%. After Margaret Thatcher came to power, there were accusations that her Government would double the tax: in the event, it was increased to 15%, which to the average consumer is as near as makes no difference. But former Chancellor Geoffrey Howe still gets miffed when his VAT increase is described as “doubling” the rate.

There was one more hike in the VAT rate, and that was on the watch of “Shagger” Major – to the present 17.5%. Now there is talk of an increase to 20%, which would bring the Treasury more than ten billion notes’ extra revenue a year. Such a rate is not unusual across the EU: top rate VAT in France is 19.6%, with Germany and the Netherlands at 19%, Austria and Italy at 20%, and Sweden and Denmark at a whopping 25%.

But increasing the top rate of VAT is not the only possibility: the scope of the tax could be widened as well. Right now, we have a 5% reduced rate and, of course, a “zero rate”, which effectively exempts a range of goods. An increase in the reduced rate – Spain and Portugal are both following the course this year – brings in more revenue, with an ending of zero rating for some products adding yet another stream.

And a reduction in the range of zero rated goods could prove mightily controversial: remember the froth generated by the Fourth Estate when the idea was floated that childrens’ clothes might cease to be zero rated? But, at the start of a new Administration, it might be thought worthwhile to bite the bullet and get it over with quickly.

In the upcoming “Emergency Budget”, watch for a hike in the top rate of VAT for definite, with an increase in the reduced rate almost a certainty, and a reduction in the scope of zero rating a middling possibility. You read that here first.