With the emergency Budget less than a week away, another business bigwig has predicted an increase in the UK VAT rate. Tesco finance director Laurie McIlwee fears the government may even abolish VAT exemptions, which apply to such things as food, children's clothes, goods/services for the disabled, newspapers, and magazines.
"I fear the plan is VAT on food," he told the Guardian. He also urged the chancellor to keep UK VAT rates steady for the time being: "The economy is recovering, but it is pretty fragile, and so a VAT increase in the future would be more appropriate than one that is immediate."
"VAT is going to be part of the austerity package but it is a question of when you do it. The best thing would be to wait a bit," he added.
How high is UK public sector debt?
In April 2010, UK public sector debt stood at £893bn. But, according to the BBC, the UK government spent around £2.1trn bailing out British banks - and a significant amount more on social security and welfare payments as a result of the recession that followed the financial crisis.
Thus, in this context, the nearly £900bn in accumulated debt may not seem so bad. Still, it is clearly unsustainable. To balance the books the government has no other option than to increase taxes and/or reduce spending.
How much money could the government raise by abolishing VAT exemptions?
Again, according to the BBC, the UK spent £71.5bn on food in 2009. Thus, if the government started charging VAT on food, it would make about £700m for every 1% it charged. So, let's say it increased VAT on food to the 'reduced' 5% rate, it could raise an additional £3.5bn in revenue every year. If it increased it to the current 'standard' 17.5% rate, it could raise an additional £12.25bn per year. And if it abolished the exemption and increased the standard rate to 20% or 25%, it could raise £14bn or £17.5bn extra a year respectively.
Moreover, the BBC says the government could raise between £1-1.5bn a year if it started charging VAT on clothes and shoes for small children.
Alternatively, it could charge full VAT on newspapers, books and magazines and raise between £1.3-2bn more per year.
In total then, the government could raise about £20-25bn a year in additional revenue if it abolished the current VAT exemptions and increased the standard UK VAT rate to 20/25%.
How much money could the government raise by increasing VAT?
If the government increased the standard UK VAT rate from 17.5% to 20% it could raise about £12bn extra each year. If it increased the rate to 25%, it could potentially raise an additional £36bn a year - albeit at the expense of higher inflation and assuming that current spending patterns remain consistent (which is far from certain, since VAT increases generally result in increased prices, as retailers pass the tax burden onto consumers).
Therefore, the combined abolition of VAT exemptions and an increase in the standard rate of VAT to 20/25% could raise an additional £32-61bin per year - hardly a drop in the ocean, but still somewhere short of eliminating the accumulated debt.
How much VAT / sales tax is charged overseas?
Across Europe VAT / sales tax rates vary from 15% to 25% - the European average is somewhere around 20%.
In the USA, however, where sales tax is levied at the state level, tax rates range from nil (in Montana, New Hampshire, and Oregon) to 8.25% (California).
Why the difference in VAT / sales taxes around the world?
Very simple really. European countries tend to spend more on public services - such as education, healthcare, and social services - than other nations. Hence they need to raise more revenue to pay for them through higher taxes.
** UK VAT Rate - Additional Information & Advice **
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