VAT Rate Steady, VAT Increases – How?

On Saturday, in another EU member state, the cost of gas and electricity rose significantly. The increase was not imposed by the suppliers, and no tax rate increased. The price hike was achieved by reclassifying those sources of household power, taking them from the lowest VAT rating to the highest, from a mere 6% rate to a full 23%.

This was one of many VAT reclassifications to be imposed in Portugal, as part of the austerity drive which had already been decided upon by the outgoing PS Government of José Sócrates and is being enacted by the new PSD-led administration of Pedro Passos Coelho. The idea of moving consumer goods up the VAT scale was discussed in this blog last October.

The impact of increased gas and electricity costs can be seen from the number of households qualifying for payment support: this includes long-term unemployed, pensioners, families with low incomes and those with disabilities. In a country with a population of just over ten million, it is reckoned that 700,000 families will need help with paying their power bills – between 15 and 20% of all people.

Added to this is the increase – by around 50% - of bankruptcy and insolvency cases in the country, based on figures from the first quarter of 2011. That shows the pressure that many in Portugal are under even before the austerity measures bite, and the thought enters that an orderly restructuring of debt, after it happens in Greece, will have to happen elsewhere in the Eurozone.

But the lesson for the UK is that VAT – a very effective revenue raiser – can be tapped easily by Governments needing to increase the tax take. Here, we still have a wide range of goods that are zero rated, and although there would be howls of protest from the Fourth Estate if that were to change, an administration with years left before the next General Election could get away with it.

And that is why we should watch events elsewhere in the EU, rather than putting them in a box marked “abroad and doesn’t affect us”. Because it could end up affecting us.