VALUE ADDED TAX
Synopsis: VAT looks set to rise, whatever the shape of the next government
According to Chris Giles, the Economics Editor of the Financial Times, the government that emerges after 6 May will have to find around £37bn in annual savings and/or tax cuts by 2013/14. The driver for this number is the Fiscal Responsibility Act 2010, which quietly passed into law in February. Under the Act, the Treasury 'must ensure' that by 2013/14 the public sector net borrowing has been halved as a percentage of GDP. The Act set the framework for the Budget 2010 numbers, but its critics point out that the Act's six sections contain no penalties for failure.
To date the three main parties have identified spending cuts, including the ubiquitous 'efficiency savings,' of up to £10bn, so there remains a very large hole to fill in the next few years. It was therefore interesting to see a new report on indirect taxes from KPMG, the professional services group. It highlights that:
· The UK has the fourth lowest VAT rate in the EU, being undercut by Cyprus, Luxembourg (both at 15%) and Spain (16%). The average EU rate is 20% and Sweden pays 25%.
· From a standing start in post-war France, VAT is now a key part of the tax system of all major developed economies, except the USA. VAT now accounts for about 19% of tax revenues for the OECD members. Even in the last non-VAT bastion of the States there is talk that Obama may be forced to introduce the tax, given his pledges about not increasing income tax on the middle class.
· While corporate tax rates have been falling globally, 'standard VAT rates have been remaining constant and, in recent times, have been trending upwards'. At the same time there has been a move to broaden the taxable base by reducing exemptions.
· VAT has become 'that tax of choice' for many governments. KPMG puts this down to three main factors:
1. 'Indirect taxes are charged on the consumption of goods and services, which is significantly less mobile and less volatile than corporate profits or labour'. This means that VAT is a more stable source of revenue for governments. Its focus on consumption also means VAT is potentially less damaging to the economy than taxes directed at income or capital.
2. VAT delivers revenue more quickly than other taxes: it is generally paid at the point of sale, not months or even years later. It can also be a more cost effective tax to administer than taxes on individual or business profits.
3. Organizations such as the IMF, EU and OECD have influenced the spread of VAT as an efficient means of raising revenue without the global or regional distortions that other taxes can create.
According to HMRC's tax ready reckoner, an extra 1% on the standard rate of VAT would raise £4.65bn in 2010/11 against £4bn for a 1% hike in basic rate tax. If VAT were raised to 20% - a second 2.5% hike after the one in January – the government's coffers could be swollen by close to £12bn a year.
COMMENT
None of the main parties has ruled out an increase in VAT, although Labour's manifesto pledges not to extend the tax base to 'food, children's clothes, books, newspapers and public transport fares'. The Liberal manifesto's references to VAT cover only a promise to 'equalise VAT on new build and repair on an overall revenue-neutral basis' and a refund of VAT to mountain rescue services. VAT is not mentioned once in the Conservative manifesto.