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News - 28 October 2003
Has he got VAT in his sights?

Pick a (Business) Tax and Increase It

A predicted £10bn shortfall in the government’s finances will compel Gordon Brown to get extra revenue from somewhere and the business community is the most likely option.

The rumour mongers were predicting the imposition of capital gains tax on the sale of a primary residence (i.e. the place where people live as opposed to holiday homes or buy-to let properties) but that has largely been discounted as political suicide and the government were very quick to deny it.

There are three taxes that have some room for increase. Income tax, National Insurance and VAT. With the current controversy over the average 12.9% increase in council tax this year and probably more to come in the south-east at least due to the reorganisation of government support for the region which saw considerable diversion of funds to the less prosperous north, it seems unlikely that he will impose a greater burden on the individual.

Also the government’s election manifesto pledged not to raise income tax. National Insurance has just been raised and is still causing squeals of protest from employers who have had to foot most of the bill. The general public seemed to take it in their stride but they may not be so sanguine about another increase so soon after the last but the Chancellor could fiddle with the upper earnings limit to get an extra £1bn per annum.

This leaves VAT, which has not increased since 1991 when it was raised from 15% to its current 17.5%. Raising VAT would also have the added advantage that it would bring us more into line with most of continental Europe which levies 21% on the cost of goods (although it has to be said that the basic cost of many of the goods is cheaper than in the UK). Increasing VAT to 18.5% would generate nearly £4bn for the Treasury but the worst affected would be the less well-off. Balanced against this VAT is a tax on consumption and, unlike income tax or National Insurance people have the option to reduce the burden by simply spending less.

If, as seems likely, the Chancellor has VAT in his sights it is essential that small businesses make some preparations for a reduction in consumer spending that may result, at least in the short term. It is time for independent retailers in particular to look at their overheads and take advantage of any deal that can save them money. Look at the special card transaction rates (under “partner benefits” on the home page) that have been negotiated for members of small business associations and also the utility broking service.

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