VAT rise – is it really that bad?

June 29, 2010


Rachel Mason is public relations manager at Fair Investment Company. The opinions expressed are her own.-

So the new coalition government is putting VAT up from 17.5 percent to 20 percent on January 4 2011 and the country is up in arms, but is it really that bad?

Okay, in an ideal world, taxes would be low and public services would be top quality, but sadly, the world we live in is not like that. The Institute of Economic Affairs (IEA) says Britain’s real debt is already 4.8 trillion percent – six times higher than the official figure of 772 billion pounds – and the simple fact is we need to pay it back, and to do that, the government needs to raise tax and cut spending.

A rise on income tax would have been a very unpopular move, so the government really only has one option left – VAT.

As George Osborne said, “This single tax measure will by the end of this Parliament generate over £13bn a year of extra revenues. That is 13 billion pounds we don’t have to find from extra spending cuts or income tax rises.”

Considering what VAT actually is, the reaction to the rise has been disproportionate. For a start – did anyone really notice a big difference when Labour cut VAT to 15 pounds? No? Well, we probably won’t notice a difference when it goes up by the same amount.

What people need to remember is that VAT is not a rise on everything; it is value added tax only on non-essential goods. Essentials – that is things like food and kids’ clothes, books and newspapers and public transport – are not subject to VAT, and many other items carry the reduced rate of 5 percent, including gas and electricity, sanitary hygiene products and children’s car seats.

I know many are arguing that poor people are going to be hit the hardest, but on smaller items, a tube of toothpaste for example; a rise of 2.5 percent is less than 2p, pretty negligible. Yes, big items will see a difference, but let’s be honest here, if you could afford to spend 950 pounds on a big screen plasma HD TV, then you can probably afford the 23.75 pounds extra it is going to cost you as a result of the VAT hike.

I do feel sorry for retailers though. Obviously the rise itself can simply be passed on to their customers if they cannot swallow it themselves, but think of all that re-pricing they are going to have to do.

Back in November 2008 when the Labour government cut VAT, many shops didn’t bother to change their prices, choosing instead to give their customers a nice little surprise when they got to the till.

But when it goes the other way, they won’t be able to get away with it – it’s illegal to advertise an item for sale at a price which is lower than the actual amount to be paid, so shops are going to have to either bear the brunt of the tax themselves, or start the arduous task of re-pricing everything in their stores.

But still, isn’t this a small price to pay?

Chancellor George Osborne has pledged to balance Britain’s books within five years. A lot of his plans on how to do that have been unpopular, but surely a couple of quid extra on the weekly shop is a price worth paying if it helps us get back into the black?

Picture Credit: A woman browses among shirts on sale at a street market in London June 23, 2010. REUTERS/Chris Helgren

One comment

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The one thing that irks about this proposal is the poliking that is going on. In particular, the budget made a shallow nod towards “fairness” by raising the income tax threshold by £1k – the first part of a Lib Dem policy initiative to raise the minimum barrier to £10k. Well done them! Thats something to take to the next election, eh?

The flipside to this is that to pay for this costly measure, VAT has had to be increased by a higher amount. This means that middle income people (obviously there are measures to prevent the well-off from benefitting) who already have jobs will get a tax break in one hand and a tax rise in the other – they’ll be worse off but not by much. For those on benefits, however, there is no such rise – in fact Mr Osbourne is cutting in this area as much as is humanly possible – but the same impact from higher VAT.

Fairness? Are the Lib Dems proud of that one now?

We should have had a smaller rise, say 1% to 1.5%, in VAT, which I accept needed to go up, rather than this blatent attempt at politiking. Is this the new politics?

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