Hike in VAT will hit consumers at the tills, in pubs and at the pump
Wednesday 23 June 2010
the government forecasts that the rise in VAT to 20 per cent will fill the Treasury coffers with an additional £13.5bn in the final year of this Parliament in 20015 – making it the biggest driver of revenues unveiled yesterday.
But the rise will hit consumers every single day from 4 January next year whether they are buying clothing, going to the pub, filling up their car, eating at a fast-food restaurant or booking holiday accommodation in the UK. In short, this regressive tax, which takes no account of a person's ability to pay, will hit those on the lowest income the hardest.
In real terms, the VAT rise will add 2.1 per cent to the price of everyday goods, leading to an extra 2.5p on a litre of petrol, 12p on a packet of cigarettes and an average of 7p on a pint of lager, according to Kelkoo, the price comparison website.
The only good news for hard-pressed UK consumers is that the Chancellor wrong-footed some forecasts by keeping items classed as "essential", including food, children's clothing, newspapers and magazines, exempt from VAT.
George Osborne said: "The years of debt and spending make this [VAT rise] unavoidable." The Treasury has forecast that the rise in VAT will generate additional revenues of £12.1bn in its first full year of implementation in 2011/12, but this would rise to £13.45bn in 2014/15.
But Harriet Harman, the acting leader of the Labour Party, said that rise in VAT "punished the poorest the most", saying it would leave pensioners, for example, with less money to spend. The Government hopes that by delaying the increase in VAT till January, it will minimise the impact on consumer spending at a time when the recovery is fragile. But economists fear that the rise in VAT could trigger a sharp rise in inflation and therefore higher interest rates, which could lead to a "double-dip" recession.
Simon Newark, a VAT partner at the accountancy firm UHY Hacker Young, said: "A VAT hike could push up prices on the high street by around 2 per cent, which would have a very significant impact on inflation. Higher inflation could trigger interest-rate rises, risking the spectre of the double-dip recession."
The impact on consumer spending of the rise in VAT will be most marked on big-ticket items, such as TVs and washing machines. According to the price comparison website Kelkoo, the price of a Lady Gaga CD will only rise from £8.95 to £9.14 in January, but it would add £63.79 to a sofa from DFS priced at £2,995.
Yesterday's survey by Kelkoo also found that after the change in VAT, 43 per cent of Britons will spend less once the new rate takes hold. Of those surveyed, the biggest group at 30 per cent said they would cut back on dining out. Following closely behind, 28 per cent said they would reduce their spending on home entertainment, such as music, DVDs and video games, and 26 per cent plan to trim their expenditure on travel, holidays and hotels.
Based on a survey of 2,000 people and their spending plans with VAT at 20 per cent, consumers will spend £324 per person less on retail goods from £1,836 to £1,511, said Kelkoo.
Stephen Robertson, director general of the British Retail Consortium, said: "We didn't want a VAT increase. It'll hit jobs, consumer spending, the pace of recovery and add to inflation, but we accept the Government has no easy options."
In May, the BRC warned that increasing VAT to 20 per cent would cost 163,000 jobs and reduce consumer spending by £3.6bn over four years. While opinion among retailers was divided about how much spending the recent rise in VAT sucked forward, many shoppers did snap up big ticket purchases before it went back up to 17.5 per cent on 1 January 2010.
The accountancy firm Deloitte said that the average worker earning £24,000 will pay an extra £183-a-year as a result of the VAT rise.
The rise in VAT will also hit motorists at the pump. The Automobile Association said with fuel duty going up 1p a litre in October and another 0.76p a litre on 1 January, the hike in VAT adds £117.98 to the annual cost of fuel for a family with two petrol cars, based on today's prices.
For pub goers, the Campaign for Real Ale said the VAT increase would add 10p on to a pint of beer and would increase the rate of pub closures from the current level of 39 a week in the struggling sector.
But in a rare piece of goods news for the nation's drinkers, the Chancellor did not unveil an increase in beer tax in yesterday's Budget.
Brigid Simmonds, the British Beer and Pub Association's chief executive said: "We applaud the Government's decision to freeze beer tax and deliver on its promise made in the coalition agreement to not penalise pubs, responsible drinkers and important local industries."
ZERO AND REDUCED-RATE VAT
0%: Books, children's clothing and footwear, lottery tickets, maps, magazines, and food. (Some food and drink items, such as snacks and alcoholic drinks, are standard VAT-rated.)
5%: Children's car seats, gas or electricity for domestic usage, energy-saving materials, smoking cessation products, contraceptives and women's sanitary towels.
Case Study: 'This will have a huge effect on some firms'
Tom Harvey, 33, of the Lake District, runs Clocktower Electrics with his parents in Cumbria. They employ four other members of staff, selling washing machines and domestic appliances, with a turnover of £300,000.
"The VAT rise was what we expected. For retailers selling non-necessity items or with extremely low margins, it could have a huge impact. Some businesses will have to look at their business models and see whether they work now they need to incorporate this higher level of tax. But for us, I don't think the VAT rise will make too much of a difference. We might see a bit of a boost in sales beforehand and people might start buying appliances at the cheaper end of the scale. But if your washing machine is broken, it needs replacing; it's not something you can put off. I don't think an extra £10 on a £500 washer is going to make any difference to people. So I think raising the VAT is a sensible way of balancing the books.
"I'm happy to see a reduction in corporation tax in the budget – it will be very beneficial to small companies like ours and can only be a good thing. "Small businesses" to the government can mean around 200 employees, not five. Enterprise schemes and so on are snapped up by the bigger companies and it can feel like small and medium sized businesses are ignored.
"I believe in conservative values both at home and as a business owner. I have always voted Conservative and will continue to do so unless they make a big mistake. I think the Government put forward a strong budget."
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Pension mortgages: 'The advice I was given was wrong and now I face losing my home'
You'll need £220,000 for a minimum wage in your retirement
Questions of Cash: I checked in with Air France in time and still missed the plane
Minister's pension promise to firefighters challenged
Bank-beating exchange rates on your international payments
- 1 Planes go hybrid-electric in important step to greener flight
- 3 Antonio Martin shooting: Mayor says there should be 'no comparison' to Ferguson
Nigel Farage defends Kerry Smith 'ch***y' comment: 'If you are going for a Chinese, what do you say you’re going for?'
Rozanne Duncan: Ukip expels councillor for 'jaw-dropping' comments made in BBC TV interview
Germany anti-Islam protests: 17,000 march on Dresden against 'Islamification of the West'
British actor Idris Elba cannot star as James Bond because he is black, says shock jock Rush Limbaugh
Panic Saturday: 13 million Britons spend £1.2bn – while 13 million others across the country live in poverty unable to afford food
BBC director Danny Cohen: Rising UK antisemitism makes me feel more uncomfortable than ever
iJobs Money & Business
Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...
£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...
£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...
£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...
Day In a Page
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens