UK Tax Bombshell: 20% VAT

A rise in VAT is looming whichever party wins the general election, as Labour and the Conservatives draw up plans to balance Britain’s books.

Alistair Darling and George Osborne, the Shadow Chancellor, are both considering raising VAT to as high as 20 per cent — the European average — from the current rate of 17.5 per cent, The Times has learnt.

Doing so would raise an extra £13 billion a year at a time when financial markets are searching for signs that whoever takes power is serious about tackling Britain’s £178 billion deficit.

Though Labour and the Tories have denied having any current plans to increase VAT, neither will rule it out and The Times understands a rise in the tax is being considered by both parties.

One City source close to the Tory tax team said: “There is a view across the Conservative Party that VAT is going to have to go up.”

The Chancellor is also keenly aware that Britain needs to retain the confidence of the credit-rating agencies. He has privately ruled out either raising income taxes or increasing the scope of VAT, but has deliberately left open the possibility of increasing the sales tax in the next Parliament.

It is understood that there are discussions in the Treasury about whether the Government should abandon its deliberate pre-Budget opacity and instead look to win points for honesty by admitting that VAT may have to rise.

Ken Clarke, the Shadow Business Secretary, told The Times that any post-election cuts imposed by a Tory government would be worse than the squeeze of the early 1980s. “We are going to have to be much tougher on public spending than Margaret Thatcher ever was,” he said.

Asked about VAT, Mr Clarke told The Times: “We are vague about tax increases because we don’t like them.”

David Cameron signalled that he would go into the election seeking to distance himself from the inevitable economic pain that was to follow. “The cuts that are coming, make no mistake — they are Gordon Brown’s cuts,” he told the Scottish Conservative conference in Perth yesterday. “That is his inheritance to Britain.”

His comments came as the latest indicators from the eurozone suggested that the economic recovery may be stalling.

The German economy, Europe’s largest, failed to grow at all in the last three months of 2009 after two quarters of growth. The eurozone as a whole grew by only 0.1 per cent, a slowdown from 0.4 per cent growth in the previous quarter. Italy slipped back into negative growth and Spain and Greece remained in recession.

February 13, 2010
Roland Watson, Suzy Jagger and Rachel Sylvester

Source: The Times

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