How Tories kept secret of 15% VAT hike

The Conservatives secretly agreed plans for a "massive" increase in value-added tax from 8 to 15 per cent almost a year before the 1979 general election, party papers from the period, seen by the Independent, show.

The charge that the Tories would double VAT on taking office was levelled during the election campaign by the Prime Minister, James Callaghan, and other leading Labour figures. It was denied both by Margaret Thatcher, the leader of the Opposition, and byGeoffrey Howe, the shadow Chancellor, in a campaign in which the impact on prices of the Conservative's declared plans to switch from direct to indirect taxation played a significant part.

Sir Geoffrey (now Lord Howe) declared: "We have absolutely no intention of doubling VAT." The allegation was depicted as one of Labour's "dirty dozen" lies in a Conservative press release.

But papers marked "secret" and circulated in numbered copies only show that proposals for a "massive" hike in VAT to 15 per cent or even 17.5 were canvassed in February 1978 by Lord Cockfield, a member of Sir Geoffrey's economic team.

On Sunday 11 June 1978, at a meeting at Sir Geoffrey's home in Fentiman Road, Lambeth, south London, agreement was reached in principle to raise VAT to 15 per cent. That was 11 months before the election that swept the Conservatives to power. Those present included Sir Keith Joseph, Nigel Lawson, Peter Rees, Lord Cockfield and Patrick Jenkin. The papers record: "It was agreed that the major changes in the tax structure should be made early on. Once VAT had been raised it could not be touched again withi n the first parliament".

The aim was to allow Sir Geoffrey to honour his repeated pledge to switch taxation from "pay-as-you-earn to pay-as-you-spend", allowing the big cuts in income tax which marked Sir Geoffrey's dramatic first budget six weeks after the Tories took office. He slashed the top rate from 83p in the pound to 60p, cut the standard rate by 3p and raised thresholds, covering much of the cost by raising VAT.

In his recent memoirs, Conflict of Loyalty, Lord Howe says of Labour's charge that the Tories planned to double VAT: "We had no difficulty denying it. For there was no prospect, on even the most gloomy of expectations, of our having to go beyond a rate of 15 per cent.

"Some critics afterwards thought it pedantically misleading to rest our case on the fact that twice 8 per cent (the then basic rate) was 16 and not 15 per cent. They also overlooked the fact that some goods (about 6 per cent of the basket) were already taxed at 12.5 per cent: the weighted average impact of the existing dual rate was 8.5 per cent. So our denial was more than technically correct." He dismissed the row as "part of the small change of election campaigning".

Lord Howe told the Independent last week: "The intention was always to make a massive tax switch and I had argued that in every conference speech I had made. The only question was how far we should go". The 15 per cent rate, he insisted, was only finallydecided just before the 1979 Budget. "We weren't able to know before taking office what the reaction in the Treasury would be."

Gordon Brown, Labour's shadow Chancellor said: "Now that Kenneth Clarke has made it clear that in principle he favours the extension of VAT, the Conservatives will be forced to come clean before the next election on what their private plans are."