(Coming To AmeriKa?)…Osborne Increases U.K. Value-Added Tax Rate to 20%

Tuesday, June 22, 2010
By Paul Martin

BusinessWeek.com
June 22, 2010

By Andrew Atkinson

June 22 (Bloomberg) — British Chancellor of the Exchequer George Osborne increased the value-added tax rate to 20 percent from 17.5 percent in the first permanent change to the levy on sales of goods and services in almost two decades.

“The years of debt and spending make this unavoidable,” Osborne told Parliament in London in his emergency budget today as he announced a package of spending cuts and tax increases to cut the U.K.’s record deficit.

The rate will increase from January and produce more than 13 billion pounds ($19 billion) a year of extra revenue by the end of this Parliament in 2015, Osborne said. “That is 13 billion pounds we don’t have to find from extra spending cuts or income-tax rises,” he said.

The VAT increase dwarfed other revenue-raising measures in a budget that sought to all but eliminate a deficit that reached 11 percent of gross domestic product last fiscal year.

The tax generates about 15 percent of total government revenue and retailers say the rise may dampen consumer spending as the economy emerges from its worst slump since World War II.

“We understand that the budget deficit needs to be tackled but we think the focus needs to be cutting public spending over tax rises,” Krishan Rama, a spokesman for the industry lobby group, the British Retail Consortium, said in a telephone interview yesterday. “What we’re concerned about is that the recovery at the moment is very fragile and consumer confidence is also fragile, so we don’t want something to fracture that.”

Jobs at Risk

The BRC said in May that a VAT increase of this size would cost 163,000 jobs over four years and reduce consumer spending by 3.6 billion pounds over the same period.

VAT has remained at 17.5 percent in every year except one since 1991, when John Major’s Conservative administration raised the rate from 15 percent to help plug a deficit. Gordon Brown’s Labour government introduced a temporary reduction to 15 percent last year as part of a 20 billion-pound stimulus package to fight the recession.

Britain’s 17.5 percent VAT rate is one of the lowest in Europe. Among major western European countries, only Spain has a lower rate at 16 percent. The levy is 19 percent in Germany, 19.6 percent in France and 20 percent in Italy. There is no VAT system in the U.S., where each state levies a sales tax.

Revenue Forecast

VAT is forecast to raise 80.7 billion pounds this fiscal year and 111 billion pounds in 2015-16, according to revised forecasts published today by the independent Office for Budget Responsibility.

A few items deemed necessities, such as food, children’s clothing and books, are exempt from VAT to protect the poorest households while domestic fuel is charged at 5 percent. Osborne said essential items would remain free of tax over the five years of this Parliament.

Danny Gabay, a former Bank of England economist and director of Fathom Financial Consulting in London, said the higher sales tax risks keeping inflation above the 3 percent upper limit of the government target well into 2011.

The increase will cost charities at least 150 billion pounds a year in unrecoverable tax, according to the Charity Tax Group, which represents more than 400 non-profit organizations. The government should introduce a rebate scheme for charities to help limit the damage, the group said in a statement.

Marks & Spencer Group Plc, the largest U.K. clothing retailer, said in a statement it welcomed the fact there was now clarity on VAT.

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