TAX NEWS - June 2010

UK Tax: VAT Rise 'Will Be Effective Way To Raise Cash'

Britons should steel themselves for a rise in VAT to at least 20% as the Government seeks to raise much-needed cash, experts have warned.

The Sky News Money Panel predicted that the Chancellor would push up the tax in his emergency Budget to haul in £12bn while punishing shoppers.

Business experts made the VAT prediction ahead of the Bank of England's last decision on the interest rate before the June 22 Budget.

They correctly forecast the rate to stay unchanged at 0.5%, where it has been for the past 14 months, despite some concern over the UK's currently high inflation.

"Interest rates and quantitative easing (QE) should remain on hold this month until we have seen the emergency Budget and another month's money supply data," said Miles Templeman, Director General of the Institute of Directors.


VAT is currently the elephant in the room – it simply has to increase -- Tax expert Angela Beech

"The Monetary Policy Committee's fiscal assumptions are currently based on the March Budget."

With the emergency Budget due in less than a fortnight, members of the Sky News Money Panel had their own views on how the coalition should raise the deficit to reduce taxes.

"VAT is currently the elephant in the room – it simply has to increase," said tax expert Angela Beech.

She predicted that the rate of sales tax would rise to 20%, as other countries in Europe prepared to make a similar move.

George Bull, head of tax at Baker Tilly, told Sky News a VAT rise could be an efficient way to drum up funds if applied fairly.

"Increasing the VAT rate to 20% could generate almost £12 billion for the economy, the equivalent of around 3p on income tax, so this would be a very effective way to reduce the deficit," he said.

"It would be important to increase the number of items that qualify for the reduced rate and to ensure that low income groups did not suffer."

Former trade minister Digby Jones agreed that it would be easy and quick to collect extra revenue generated by a VAT rise, and added that he would bump the rate up to 22% if it were his decision.

The only downside, Lord Jones claimed, was that it would place upward pressure on inflation.

Of the Money Panel experts, only Dragons' Den tycoon James Caan said he would leave the VAT rate unchanged.

"If increased it would hit all consumer spending, leading to contraction in demand that would spiral into contraction in supply and rising unemployment," he said.

Another key tax the Money Panel expected to be targeted was Capital Gains Tax (CGT).

David Frost, director general of the British Chambers of Commerce (BCC) said his organisation would prefer no change to CGT as to raise it would impact entrepreneurial activity.

But economist Nick Parsons said he would increase the rate of capital gains tax to the same rate as an individual's highest rate of income tax and make capital losses allowable as a deduction from income tax.

"This would remove the artificial distinction between capital and income, lead to a massive simplification of the tax system and remove the scope for artificial tax avoidance schemes," he said.