VAT rise to 20pc a near certainty
Thursday 18th February 2010
By Mike Jones
Speculation that the rate of VAT will increase to 20% is made into a near certainty if you examine current trends and the lessons of history. This rise in VAT makes buying a used rather than new home the better option. You can check propertywide.co.uk for listings
That is the verdict of LexisNexis tax expert, Paul Stainforth. Research into European VAT rates and past VAT rises support the view.
Stainforth said: "Given the size of the deficit, and the trend to increase the rate of VAT in EU Member States, it could be a big surprise to the markets if an increase in the UK’s standard rate of VAT is not announced in the first Budget after the election, regardless of which party gets into power. An increase by 2.5% to 20% would bring the UK’s rate more closely in line with the EU average of around 20%."
The three drivers for an imminent change are:
1 History suggests that rises in VAT tend to be made at the start of a new Parliament, regardless of whether there is a change of Government.
Three of the last four major rises in VAT were made at the start of a new Parliament. VAT increased from 12.5 to 15% by June 1979 Budget - this followed the May 1979 election won by the Conservatives Extension of 25% rate to "luxuries" in first full Budget of new Parliament, in April 1975 following the October 1974 election won by Labour. Introduction of 25% VAT rate for petrol in third 1974 Budget - this followed October 1974 election won by Labour. The main exception was the increase in 1991 from 15% to 17.5% - this was made towards the end of a Conservative Parliament as the price paid for removing the poll tax. And we needn’t necessarily expect too much warning for any increase – one of the most recent UK precedents, the 12 June 1979 Budget, saw VAT increased from 12.5% to 15% six days later.
2 A rise in the UK’s standard rate (17.5%) would bring us more in line with the average EU standard rate (of 20%).
VAT is an EU tax so any discussion of the appropriate rate should take into account the European context. Of all the EU countries, only Luxembourg and Cyprus (with standard rates of 15%) and Spain (16%) currently have lower rates of VAT than the UK - and one of those countries (Spain) has already pledged to increase its rate of VAT (to 18%, from July 2011). Even Germany, which traditionally has low rates of VAT, now has a higher standard rate of VAT (19%) than the UK.
3 A rise would be consistent with the upward trend in other EU Member States.
Since January 2008, we have seen rises in the rate of VAT in EU Member states:
1% (Czech Republic - current rate 20%)
2% (Estonia - current rate 20%)
3% (Latvia and Lithuania - both with current rates of 21%)
5% (Hungary - current rate of 25%)
Germany introduced a 3% rise in VAT from 16% to 19% in 2007.
Finland and Spain last year promised VAT rises in 2011 of 1% and 2% respectively.
While the UK made a temporary 2.5% cut in 2009, only one EU Member State actually reduced the rate of VAT over the last two years - this was Portugal (which reduced its rate by 1% to 20% in 2008 in an overtly populist move prior to elections).
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