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Guest opinion: what next for VAT?

"As the VAT increase takes effect, it has become increasingly clear that political parties cannot agree on whether increasing VAT is the correct course of action.


However, a look around the other 26 member states shows that many other governments have decided to resort to the same measures and increase VAT.

Several other countries, such as Spain, Latvia, Lithuania, Hungary and Estonia have already increased their rates, and Portugal, Poland and Slovakia all increased their standard rate of VAT with effect from this year.
On analysing the prevalent VAT rates across Europe it becomes clear that, even though the UK’s 20% rate may appear to be relatively high, the situation could be much worse.

Both Portugal and Poland increased their rates to 23% and there are three member states with a standard VAT rate of 25%.

To put this in perspective, there are only seven member states with a lower VAT rate than the UK’s 20%.

For some, this prompts the question as to whether the UK government will increase the rate further still.

There is nothing in EU legislation which sets a maximum VAT rate – the only stipulation is that the standard rate cannot be lower than 15%.

So member states are free to set a VAT rate which they believe is appropriate for them at any given time, bearing in mind their respective financial positions.

Future governments or even the current coalition could certainly consider a further increase.

However, the potential reduction in consumer spending that might result would need to be taken into consideration when considering the potential revenue generated.

A further concern is the UK’s relatively long list of goods and services which are taxed at the zero rate of VAT (‘zero-rated’).

This list includes food, children’s clothing and books.

The UK is permitted to keep these items free from VAT as, during the transitional stage of the single market, member states which applied lower rates than 5 per cent (including the UK’s zero rate) which were in force on January 1, 1991 were allowed to maintain them.

So, although the UK is allowed to keep its ‘zero-rate’, it is not required to do so.

Any government can decide to levy VAT on the items on this list, should it deem the revenue-raising opportunity too good to miss.

Taxing food and children’s clothing would have a severe effect on the poorest families.

Furthermore, once these goods and services have been taken out of zero-rating, they can never return and will in future always remain subject to VAT.

So, although the 2.5% rise is potentially bad news for consumers, the situation could be much worse."


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