BR managers also predict a backlash from passengers, already having to cope with fare increases, and from Tory backbenchers worried about cuts in rural services when the network is privatised.
BR had been doing extensive studies on VAT in preparation for 1997, when Britain must come into line with other EC countries and charge VAT on all transport including buses, flights and ferries.
But six weeks ago BR was forced to dust off its research when John MacGregor, Secretary of State for Transport, wrote to Sir Bob Reid, BR's chairman, asking for his reaction to the imposition of VAT on rail fares. BR believes Mr MacGregor was acting at the direct request of the Treasury.
Sir Bob gave a breakdown of how different rates of VAT would affect revenues. A 5 per cent levy would depress fare income by pounds 76m and 17.5 per cent would wipe out pounds 200m or 10 per cent ETHER write errorof earnings.
Sir Bob said the tax would damage the environment, with some passengers switching to roads, and services would suffer from the fall in business, with a consequent loss of jobs.
The BR chairman's letter was not specific: services under threat were not detailed and the number of jobs at risk was not spelt out. But the warning of further damage to a hard-pressed network was clear.
VAT on fares would severely affect BR budgets and investment plans. Passengers could not be expected to accept fare increases to pay for new trains and services, in addition to VAT.
'The imposition of VAT on fares would have a severe impact on our income from fares,' said a BR spokesman, who confirmed the exchange of letters. 'It would mean a number of people moving from rail to road, and we would have to reduce our services to match the reduced demand.'
The Government has never discounted introducing VAT on transport, in contrast to the refusal by Margaret Thatcher to impose it on food and children's clothes.
Mr Clarke has refused to rule out tax rises in the Budget. But VAT on transport would cause a wave of protest when the introduction of VAT on domestic fuel, announced last year, is proving deeply unpopular with the Tory rank and file.
VAT on transport could also raise the Retail Price Index.
Most European countries impose VAT on public transport at between 4 and 7 per cent. Such a tax in Britain might have to be matched by an increase in vehicle excise duty to prevent an unacceptable increase in road congestion.
Gordon Brown, Labour's shadow Chancellor, plans to table amendments to the Finance Bill after the next Budget to reverse the imposition of VAT on fuel from April. He hopes to attract enough Tory rebels to pass the amendments.
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