Why it will be more Vat on the same goods
The UK government seems set to increase VAT, so should it go for a steep rise in the sales tax or extend it to a wider range of purchases?
The retailers who successfully opposed an increase in employers’ national insurance before the election are now opposing an increase in VAT afterwards. Unfortunately, in the real world, someone will have to pay more: the question is who and how much.
The chief executive of Kingfisher, Ian Cheshire, wants the tax applied to a wider range of goods instead of a higher rate – but as Vat applies to almost everything sold his B&Q chain, he would want the pain spread to other retailers wouldn’t he. The head of Sainsbury, Justin King, doesn’t want Vat extended to food: well as a supermarket, he would say that.
But there is an economic argument for widening the tax base. When some goods were taxed at 8 or 10 per cent and others not subject to Vat at all, the differential was small and people’s spending habits were affected only marginally. But if some goods are untaxed while others carry a levy of 20 or 22 per cent, that is enough to change spending decisions. For instance, the different between tax-free food at home and Vat on a restaurant bill would make more people eat in.
Against that is the social argument that the zero-rate Vat items protect the poor, with low-earners and benefit recipients hit disproportionately by starting to tax water, food or children’s clothes. (Mr Cheshire might argue that a tax on DIY materials is a tax on the poor too, but nevermind.)
The pragmatic argument, however, is to raise the rate and leave the exemptions, despite the distortions it produces. The chancellor will upset the B&Q lobby by raising rates anyway; why upset the Sainsbury faction too by extending them? One set of enemies at a time is quiet enough.
Anyway, it is easier for retailers currently collecting Vat to increase the rate than for companies outside the system to learn its complexities. And easier too for HMRC to deal with a smaller number of collectors. On top of that, only a suicidal chancellor would risk the flak of taxing kid’s shoes or books for minor amounts. And a tax on newspapers would guarantee a hostile press.
So however unfair, it will be a higher rate on the same items. The only question is now much and when.
And if the chancellor is going to be punished for raising Vat, he might as well go for a big rise – raising the current 17.5 per cent rate to 22 rather than 20 per cent, for instance. And while he may delay it beyond Christmas, imposing the rise in stages only generates two sets of bad publicity when he can get it over in one go. When he has so much other bad news to announce, a chancellor playing it safe will thus go for a one-off hefty rise on items already subject to Vat. Tough.
