Clarke threatens to widen VAT: Indirect taxes favoured to cut budget deficit

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----------------------------------------------------------------- VAT rates in EC countries ----------------------------------------------------------------- Standard Reduced UK 17.5 - Belgium 19.5 1, 6, 12 Denmark 25 - France 18.6 2.1, 5.5 Germany 15 7 Greece 18 4, 8 Ireland 21 2.5, 12.5 Italy 19 4, 9, 12 Luxembourg 12, 15 3, 6 Netherlands 17.5 6 Portugal 16, 22 5, 4 Spain 15 3, 6 ----------------------------------------------------------------- Portugal has higher rates of 30 and 21 per cent. Items zero rated in UK: food, children's clothing and footwear, water and sewerage, books, newspapers, magazines, public transport including taxis. -----------------------------------------------------------------

THE CHANCELLOR of the Exchequer gave the clearest indication yesterday that he is considering widening the value- added tax net to cover some zero-rated goods, as part of the Budget strategy to reduce the pounds 50bn public debt.

Kenneth Clarke confirmed he wanted to shift more of the tax burden from income tax to indirect tax, such as VAT, and he emphasised that he hoped to bring Britain's tax regime into line with the rest of Europe. He said: 'I have always thought it anomalous to have such a narrow VAT base in this country and have frequently said so.'

The extent of possible tax increases will depend on the rate at which economic growth reduces the forecast for the public sector borrowing requirement. Options include imposing VAT, possibly at a reduced rate, on public transport, newspapers and books, water and sewerage. Britain and Denmark are the only members of the EC without reduced rates of VAT. Britain and Ireland are the only countries to have wide-ranging exemptions. Most, such as France, have minimal exemptions and impose VAT on food. The Netherlands has no exemptions.

Mr Clarke was speaking at a press conference for the Christchurch by-election, where the decision to impose 8 per cent VAT on domestic fuel next April is central to the Liberal Democrats' hopes of winning the seat from the Tories.

The Chancellor denied that the imposition of VAT on domestic fuel broke the Tory election manifesto. He indicated that help for those on low incomes, to be announced in the autumn, will be restricted to those already in receipt of benefit, including cold weather allowance.

Mr Clarke said reducing income tax had encouraged more entrepreneurs, reduced tax fiddles, and produced a 'sea change' in the British economy. 'My instincts remain you should keep down direct taxation. Indirect taxation is a perfectly valid way of raising revenue used by every other country.'

He went to Christchurch to deny suspicions, raised in the Labour and Liberal Democrat by-election campaigns, that the Government was planning to impose prescription charges on pensioners and hotel charges on NHS patients in hospitals. He also indicated there would be no prescription charges for children.

But he refused to rule out other options including cutting the availability of unemployment benefit from 12 months to six and making it more difficult to obtain invalidity benefit. Challenged by the Independent, he would not rule out imposing VAT on any zero-rated items.

Labour MPs believe imposing VAT on food and children's clothes would be politically suicidal. But right-wing Tory MPs, who have warned they will oppose tax increases, said privately that they would accept VAT on sewerage.