UK Cements VAT Increase into Future

December 17, 2010 Taxation in UK

George Osborne in BeijingThe UK’s Chancellor of the Exchequer has announced that the upcoming rate increase to the national Value Added Tax will not be a temporary measure and will be maintained until the country adequately lowers its budgetary deficit.

On December 16th the Chancellor of the Exchequer of the UK George Osborne announced that the upcoming rise of the national Value Added Tax (VAT) rate will be a permanent measure, and not a temporary fiscal relief strategy as indicated earlier in the year. The change is scheduled to come into force on January 4th 2011 and will raise VAT from the current rate of 17.5 percent to 20 percent.

The rate hike was first announced in July 2010 when the Chancellor revealed the latest national budget. At the time he stated that tax increase were “tough but fair” and were an “unavoidable” action for dealing with the country’s debts and budgetary deficits. However, during the announcement it was indicated that the tax rise would be a temporary measure, alongside the 50 percent top marginal personal income tax bracket. It is estimated that the 2.5 percent rise in the VAT rate will raise an additional GBP 13 billion annually for the Government. It is predicted that an average UK family will pay an extra GBP 448 in taxes per year, due to the increase.

In his latest statements the Chancellor indicated that the soon-to-be permanent tax rate should be considered as a “structural change” that is necessary in order to aid the country’s long-term fiscal position. Although, he conceded that there could be an opportunity for a tax rate cut at a time of greater fiscal stability and improved budgetary standing. Commenting on the idea, the Chancellor added, “…once we can bring some stability to the public finances, we can look at reducing the tax burden on people. But it is a complete mirage to cut taxes one year, then have to borrow the money and put up the taxes later to have to pay for that borrowing.”

Photo by HM Treasury