The Great VAT Swindle

The Great VAT Swindle

Before and during the 2010 Election campaign, neither the Conservatives nor the Lib Dems stated that they would raise VAT. In the June’10 emergency budget, the coalition government announced that VAT would rise from 17.5% to 20% effective from 4th Jan 2011. 

Read their lips

The VAT rise is quite astounding when you see the comments made before the coalition was formed:

“You could try as you say put it on VAT, sales tax, but again if you look at the effect of sales tax, it’s very regressive, it hits the poorest the hardest. It does, I absolutely promise you. Any sales tax, anything that goes on purchases that you make in shops tends to… if you look at it, where VAT goes now it doesn’t go on food obviously but it goes very very widely and VAT is a more regressive tax than income tax or council tax” – David Cameron May’08 

“Our plans involve cutting wasteful spending and stopping the National Insurance rise, our plans don’t involve an increase in VAT.” – David Cameron Apr’10

“I’ve got the document right here, You can get it on the internet. It’s absolutely clear you are planning a VAT bombshell to hit every family in the country.” – David Cameron Nov’08 (to Gordon Brown)

“There have been absolutely no internal discussions, there are no secret plans for an increase in the VAT rate. We have set out our plans and they do not involve an increase in VAT” – George Osborne Aug’09.

“The plans we set out involved around 80 per cent of the work coming from spending restraint and about 20 per cent from tax increases…. The tax increases are already in place, the plans do not include an increase in VAT.” – George Osborne Apr’10.

“Liberal Democrats have costed, in full, our proposals for tax cuts. We can tell you, penny for penny, pound for pound, who pays for them. We will not have to raise VAT to deliver our promises. The Conservatives will. Let me repeat that: Our plans do not require a rise in VAT. The Tory plans do. Their tax promises on marriage and jobs may sound appealing. But they come with a secret VAT bombshell close behind. So if you’re on an ordinary income, you have a choice. If you want your taxes to rise: vote Labour or Conservative. If you want your taxes to fall: choose the Liberal Democrats.” – Nick Clegg Apr’10

“We will not have to raise VAT to deliver our promises. The Conservatives will. Let me repeat that: Our plans do not require a rise in VAT. The Tory plans do.” – Nick Clegg Apr’10 

“There are no plans in the Conservative Party to raise VAT. I think the Lib Dems can pipe down about this now.”  – William Hague Apr’10

“I hope we don’t get a VAT rise because it is the most regressive form of tax. It penalises the poor. I hope that chancellor, together with my colleagues in the treasury, find a way that is fair so the poor, the less well-off, don’t suffer and the people with broader shoulders carry the burden.” – Simon Hughes Jun’10

“I think I would predict within a few months they [a Conservative Government] would have increased VAT to 22.5 to 25 per cent. We’re in a totally different place to where the Tories are.” – Vince Cable Sep’09

When the VAT increase was voted on in Parliament, 47 Lib Dem MPs voted in favour of the rise, 1 voted against and 8 abstained.  

Another outstanding example of Liberal Democrat hypocrisy is their stance on VAT relating to Mountain Rescue Services.

Liberal Democrats will refund VAT to mountain rescue services – Lib Dem Manifesto 2010

“The [Labour] Government has resisted calls for VAT exemption, arguing that it would not be allowed by European law, but it is absolutely clear that VAT paid could be refunded. The cost to the exchequer is small, but the difference is enormously significant for mountain rescue teams. Whatever the result on Thursday, I hope this is a policy which will be put into action.” – Danny Alexander May’10

“I was given very positive signals that this wasn’t the type of detail that would go in. This is not one of the things we had to give way on. I am optimistic that we will get it. It is a cheap ask for something that is such great value and I can’t see why they would say no to it. We can get round the European Union rules and they can then claim back a grant for the same amount. We are continuing to lobby. We haven’t had a yes, but we haven’t had a no.” – Tim Farron May’10

The Opposition tabled an amendment motion asking for an “Assessment of Impact of VAT Increase on Mountain Rescue Services”. When the motion was voted on in Parliament, 47 Lib Dems voted against the motion and 10 abstained. It could well be argued that the Opposition tabled this amendment to try to cause a split in the coalition because of the VAT exemption for Mountain Rescue Services being stated in their manifesto.  However, as it was part of their manifesto, it is surprising that not one Lib Dem MP tabled an amendment motion asking for this exception to be voted on.

A further Opposition amendment motion called for “No Increase in VAT Rate for Charities”. When this was voted on in Parliament, 45 Lib Dem MPs voted against the motion and 12 abstained.  

Was the VAT rise ‘unavoidable’?

Absolutely! The coaliton have made great play of the fact the previous Labour government considered a VAT rise whilst in power. This is true but it is quite normal and reasonable for a government to consider all options when looking to raise revenue. However, the record shows that Labour decided not to raise VAT and instead opted for a rise in National Insurance. In fact, apart from the temporary lowering and re-raising of VAT to stimulate growth in the economy during the recession,  a Labour government has never increased the rate of VAT. It was introduced in 1973 during the Heath Conservative government, as part of the pre-requisites of joining the EU (then known as the Common Market), at a standard rate of 10% with exception rates for luxury items up to 25%. In 1979, the Thatcher Conservative government merged all the rates to the level of 15%. In 1991, the Major Conservative government increased the rate to 17.5% and, controversially, raised the rate on domestic fuel and power from 0% to 8%.   

Is VAT a regressive form of taxation?

It is extraordinary that the coalition are now trying to convince the public that VAT is a progressive tax. Although VAT does raise more money from the richest in our society, it hits the poorest the hardest by taking a much higher percentage from the incomes of the less well off, as shown by a study by Kelkoo, the home comparison website:

During the last fiscal year (2009/10), the bottom 20% of earners paid 28% of their gross income in indirect taxes. VAT payments accounted for more than 12% of their disposable income. The average household paid 14% of their gross income in indirect taxes with 7.4% on VAT. High income earners paid 10% of their gross income in indirect taxation with 5.9% on VAT. Overall the top 20% paid 175% (£6.6bn) more in VAT than the bottom 20% (£2.4bn). 

Effects of the VAT rise?

The Kelkoo study also revealed:

Impact on consumers: A VAT increase to 20% would cost each of the UK’s 26.2 million households an extra £1.16 per day or £425 a year, reducing spending power by an average 1.25% per annum and increasing the annual VAT bill by 13.9%

Impact on the retail sector: The retail industry employs 3 million people and accounts for 25% of national GDP – a slowdown in the sector could lead to a further 0.5% decline in economic growth over a twelve month period

Benefit to Government: A 2.5% VAT rise would generate an additional £11.4bn for the treasury, bringing total receipts from the tax to £91.29bn from £80.15bn

Hike in price of goods: VAT increase would see cost of petrol rise by 2.5p per litre, cigarettes by 12p per pack, and a pint of lager or a glass of wine increasing by 7p on average

The report finds that the impact of any change in VAT would hit lower income groups most severely, given that they tend to pay above average levels of VAT as an indirect tax on spending.

Changeboard (a human resources jobs, career advice & community) anticipates that it will have an effect on employment: 

The increase in VAT from 17.5% to 20% could cost the country more than 200,000 jobs. VAT rises always have significant effects on employment. These can be estimated in several ways: in more sophisticated methods, using economic modelling, a 1% increase in the average VAT rate in The Netherlands led to a loss of 20,000 jobs – approximately 0.3% of the Dutch workforce (7,750,000 people). It could be much worse in the UK because the increase in VAT is so much higher and our workforce is so much larger. Using the same model, the UK can expect up to 200,000 job losses as a result of the Budget. Assuming these 200,000 people all claim job seekers allowance (between £100.95 per couple and £64.30 per individual every week), and remain unemployed for 18 months, this could cost the country approximately £1.3billion in Benefits. 

Other statements about the effects of the VAT rise:

Richard Diment, director general of the FMB (The Federation of Master Builders) said: “This VAT rise will have a disastrous affect on many businesses and people cross the UK. The new VAT rate will hit the building industry particularly hard as the industry is still struggling to recover from a recession in which it has been the single biggest cause of redundancies and business failures.”

Matthew Elliott, of the The TaxPayers’ Alliance, said: “Increasing VAT is both unfair and unwise. These forecasts show that this tax hike will cost jobs, limit economic growth and leave the Government borrowing more than it otherwise would.”

Uswitch’s small business energy expert Jake Ridge: “Small businesses are battling to recover from the recession. The VAT hike will not only cost many money to implement, but it will also make trading even harder.”

David Smith, chairman of the Shadow MPC (Monetary Policy Committee), a group of independent economists, said:  “The move would increase unemployment by 235,000 over the next decade and reduce GDP by 1.4% over the same period. Professor Smith said his Budget modelling suggested that the decision on VAT was ‘probably a mistake’.”