David Prosser: VAT rises: a question of when not if

Click to follow
The Independent Online

Outlook Here's your starter for 10: what do Cyprus and Luxembourg have in common? The answer is that they are the only two members of the European Union that currently have a lower rate of VAT than Britain – both at 15 per cent compared with our 17.5 per cent (Spain is lower too, but about to raise VAT from 16 to 18 per cent).

I'm indebted to accountants Blick Rothenberg for that little nugget. It is another reason why they, like almost every other analyst I have spoken to, think a rise in the VAT rate to 20 per cent is inevitable whoever wins the election. Even at this higher rate, UK VAT would still be lower than the EU average and only just above Germany and France (where the rates are 19 and 19.6 per cent, respectively).

Moreover, raising VAT in this way produces £12bn a year, give or take, twice as much as the national insurance increases that have proved to be such political dynamite. In short, it is difficult to understand why the Treasury ever chose to go down the NI route in the first place, other than, as political analysts now claim, that there was pressure from Downing Street for this option (NI rises have for years been its preferred option for sneaky income tax rises).

The question is what a rise in VAT might do to the retail sector, where analysts continue to fear that the recovery remains highly vulnerable. Well, many of those business leaders who have signed letters opposing the NI increases come from retailing, and one effect of higher VAT might be some more pained missives. The good news though, is that yesterday's update from the British Retail Consortium shows that sales growth appears to be continuing across the sector – another reason that the eventual election winner would give for raising VAT this summer.