1. V A T F oc us
Im m ine nt R is e
in t h e V A T R at e s ?
S P E E D R E A D A s e nior m e m b e r of H M C us t om s &
Th e autumn of 1974 saw an O ctober general
E xc is e onc e c om m e nt e d t o t h e w rit e r t h at a V A T rat e election won by Labour, quickly followed by the
inc re as e only oc c urs at t h e s t art of a ne w P arliam e nt . third 1974 Budget, which introduced a 25% VAT
H is t ory ap p e ars t o c onfi rm t h is , b ut it als o ind ic at e s rate for petrol. Th e first full Budget of the new
Parliament, April 1975, extended the 25% rate
t h at a c h ang e of g ov e rning p art y is ne c e s s ary t oo. G iv e n
to ‘luxuries’eg, white goods, j ewellery and furs.
t h e c urre nt le v e l of t h e U K ’s e c onom ic d e fi c it and t h e U nfortunately the VAT complexity of the two rates
U K V A T rat e b e ing h is t oric ally b e low G e rm any ’s , t h is caused numerous absurdities, particularly with
art ic le p os t ulat e s a p os t - e le c t ion V A T ris e e v e n w it h out mixed supplies of goods and services, which had
a c h ang e of g ov e rning p art y , and p re d ic t s a 2 .5 % an unintended adverse effect on employment. To
partly alleviate this the April 1976 Budget reduced
inc re as e t o 2 0 % in t h e s t and ard rat e and a p os s ib le ne w the luxury rate to 12.5%, whilst the standard rate
re d uc e d rat e of 8 % . remained at 8%.
Th e M ay 1979 election returned the
Timothy Lloyd is a chartered accountant. His tax Conservatives to power and their June Budget
career has involved working for Rio Tinto, BAe, and raised VAT to 15%, whilst at the same time unifying
being head of taxation at Woolworths Group plc. He
the luxury and standard rates. It is interesting that
also spent time with HM Customs & Excise developing
tax avoidance countermeasures. He is now a freelance
they did not harmonise the VAT rates at 8%, 10%
consultant. Email: timothylloyd2@googlemail.com; or 12.5%, but went straight for an overall increase
tel: 01628 855022. to 15% in a measure designed to switch from direct
to indirect taxation. Th is rate was not changed
following the 1983 or 1987 elections.
1
January 2010 saw VAT rise by 2.5% to 17.5%. Th e next rise in the VAT rate occurred in
For some businesses, the change was a repeat unusual circumstances towards the end of the
of the nightmare 13 months previously when 1987–1992 Parliament. Th e introduction of the
the rate went down; for others it was a difficult Poll Tax by the Conservatives had not only led to a
transition coming at the same time as they were change of Prime M inister in N ovember 1990, but
implementing the VAT package or, for retailers, had also seen protest riots on the streets of London.
in the middle of their post-Christmas sales; whilst In his first Budget in M arch 1991, N orman Lamont
for yet others it was a smooth process and they replaced Poll Tax with Council Tax, but raised VAT
must have wondered what all the fuss was about. to 17.5% to pay for the lost R evenue.
Yet it is all about to happen again, or is it? Th e only other rate changes, apart from the
recent 13-month reduction to 15% and restoration
V A T rat e c h ang e s to 17.5%, was in the N ovember 1993 Budget which
A decade ago I asked a very senior member of H M introduced a ( social) reduced rate of 8% for fuel and
Customs & Excise what the department’ view s power for domestic and charity use from 1 April
was on VAT rate changes and the implications. 1994. Th is was subsequently reduced to 5% in the
It was a good technical discussion on the first G ordon Brown Budget in 1997. Th e reduced
compliance requirements and processes of rate has since been extended to a variety of social
ensuring any amendments to public notices and products over the last ten years, but that is not
VA T staff training/awareness were catered for. But the
most interesting comment, which has stuck in my
directly relevant to this discussion.
inc re as e s mind, is that this is only something worried about W h at c an b e c onc lud e d , if any t h ing ,
during the first 12 months or so of a post-election from t h is h is t ory ?
are m ore Parliament. Th e thinking being the electorate will Although the number of rate increases is small,
have lived with a new VAT rate long enough by it does appear that there is a definite trend. Th e
lik e ly t o the time of the next election, assuming the new 1974 introduction of a 25% VAT rate on petrol, the
G overnment lasts for the complete term, that any April 1975 extension of 25% to luxuries and the
oc c ur at VAT increase will no longer influence voting. D o 1979 VAT rise to 15% all occurred at the start of a
the historical facts bear this out? new Parliament.
t h e s t art W hen VAT was introduced on 1 April 1973 by Th e 1993 Budget increase was the latest
the then Conservative G overnment it was at a rate following a new Parliament, being 20 months after
of a ne w of 10%, making it revenue neutral when compared the April 1992 election, but it was the first for a new
to purchase tax which it was replacing. Later that Chancellor, K enneth Clarke, and also the first of
P arliam e nt year there was the oil crisis, the miner’ strike and
s the four annual Autumn Budgets. Although the
the three-day week, all of which led to the February rise only applied to domestic and charity use fuel
and w it h a 1974 election. Th e result was a hung Parliament and power ( industrial use had been taxed at the
c h ang e of with Labour, the largest party, forming the new standard rate since 1 July 1990) and was a means of
G overnment. Th eir first Budget, M arch 1974, left pacifying our European partners concerned about
g ov e rning VAT unchanged, but extended the base. Th is was
quickly followed by a mini-Budget in July 1974
our zero rate in the new single market, it did follow
the adage of raising the rate near the beginning of a
p art y designed to attack inflation, which reduced the VAT Parliament. Th erefore it warrants inclusion with the
to 8% from the end of that month. 1974, 1975 and 1979 VAT rises.
16 Tax Journal ~ 15 February 2010

2. It can of course be argued that I have been Budget will be needed.
selective in picking the rate changes to demonstrate Th us if the election is on 6 M ay, we should expect
Th e m os t
a trend. H owever, the other changes have been
ignored since they occurred for technical or
an ‘
emergency’Budget sometime between June and
mid-July regardless of the election outcome.
re c e nt
unusual political reasons. Th e July 1974 reduction p re c e d e nc e ,
was an attempt within a hung Parliament to control V A T inc re as e
inflation. Th e April 1975 extension of the 25% Economically the U K has a deficit of 12.7% of G D P, 12 June
rate to luxuries caused absurd technicalities, for not dissimilar to that of G reece albeit G reece has a
example an electrician’ VAT on a repair of a light
s smaller economy, and post the election that deficit 19 7 9
would be 8%, but if he fitted a new plug as well the will need to be reduced by expense cuts, tax rises
whole lot attracted 25% VAT. Th is meant a rate or a combination of both. B ud g e t ,
reduction was necessary a year later. G iven the size of the deficit and as every 1%
Th e 1991 increase to 17.5% was the price to be rise in VAT raises about £4.3 billion, a VAT rate s aw V A T
paid for removing the Poll Tax. It came towards the increase is highly likely. In addition, as the proposed
end of the Parliament, in the hope that removal of N IC increase is ‘ tax on j
a obs’which could increase inc re as e d
the Poll Tax might ( proved to be the case) assist
as unemployment having an adverse affect on the
the re-election of the governing party. economic recovery, any Conservative G overnment from 12 .5 %
O verall, it does appear that VAT increases are ( a hung Parliament) should reduce N IC and
or
more likely to occur at the start of a new Parliament look to a VAT rise to replace the lost revenue. Even t o 15 % s ix
and with a change of governing party. a re-elected Labour G overnment may revisit this
N IC rise and similarly raise VAT. Finally we are
d ay s lat e r.
E urop e approaching a new Parliament and as demonstrated Th us w e
As VAT is an EU tax, any discussion on a rate rise this is always the ideal time to increase VAT.
should not totally ignore the European dimension.
An analysis of EU standard VAT rates gives an A m ount
s h ould not
average of 20.8%, with a low of 15% and a high of H aving considered all the factors indicating a rise, e xp e c t
25%. O nly Luxembourg and Cyprus at 15% are the final question is the level of increase. Th e EU
lower than the U K . Surprisingly G ermany, which VAT rate average is j above 20%, so a rise to this
ust t oo m uc h
for decades has tended to have a lower rate than the level could be ‘sold’to the public as both needed to
U K , is now higher at 19%. Th us any increase in U K cut the deficit and to bring the U K into line with w arning
VAT should restore the U K ’ historically higher rate
s Europe. A higher rate, 21%, 22% or 22.5% will be
compared to G ermany and also bring the U K in harder for the public to accept and whilst it should
line with the European average. not be ruled out, seems unlikely.
For reduced EU VAT rates the average is 8.3% So far I have only commented on the standard
and the U K at 5% has, with others, the lowest. rate of VAT, but what about the reduced VAT rate?
Th e U K at 5% is below the EU average of 8%. It
N IC and V A T inc re as e would be a simple political measure to use a ‘ EU
Th e 2009 PBR announcement of a further 0.5% average rate argument’to also raise this to 8%.
N IC increase from April 2011 ( add to the 0.5%
to
increase in 2011 already announced) was greeted P rac t ic alit ie s
as a tax on j and the Conservatives have
obs Should I be proved correct and a VAT rise does
pledged to rescind the rise. A 0.5% rise in N IC occur then how much warning is there likely
raises about £2.4 billion of R evenue, which could to be? Th e most recent precedence, the 12 June
be replaced with a 0.5% rise in VAT. Th e only 1979 Budget, saw VAT increased from 12.5% to
question is whether a new Labour G overnment 15% six days later. Th us we should not expect too
would also consider rescinding the N IC rise. much warning and of course there will be anti-
forestalling legislation to cover the announcement
P os t 2 0 10 e le c t ion B ud g e t to implementation period. H ence the time to start
W hilst we do not yet know the election date, 6 planning may be now, after all we have j hadust
M ay is the current favourite; we know the possible one rate rise, so it is probably an ideal time to
outcomes are a victory for the Conservatives, a check what went right or wrong this time round
victory for Labour, or a hung Parliament with and plan for the next rise. Also for those unable to
either a coalition or a minority G overnment. recover all their VAT, if it is economic to bring any
H istory demonstrates that since 1974, a change purchases forward, now may be an opportune time
of G overnment in an election has meant an to consider this.
immediate post-election Budget, the longest delay
being 62 days from election to Budget in 1997. S um m ary
H istory also says that if a current G overnment In the current economic climate an increase in
wins an election, there is no immediate Budget. If VAT seems inevitable. Precedence dictates that a
Labour is re-elected, will they follow this pattern? rise happens at the start of a new Parliament, so
Probably not, as the financial markets will require the only question is what rate? M y personal view is
reassurance that plans are in hand to cut the deficit. 20% for standard rate and possibly 8% for reduced
For similar reasons, with a hung Parliament a rate. W e will all know shortly if I am right. ■
15 February 2010 ~ Tax Journal 17