If the rumours circulating Westminster are true, the coalition government plan to raise the standard rate of VAT to 20% in their first budget on Tuesday. But what will this really mean for your spending power?
VAT is the tax that is charged on most goods or services sold within the UK. This includes everything from fuel to fountain pens and BBQs to beauty treatments.
There are three rates at which VAT is applied: the standard rate (17.5% - most products & services), reduced rate (5% - eg child car seats & domestic fuel or power) and a zero rate for goods and services that are exempt (eg food, newspapers & children's clothing).
Our 17.5% VAT rate is currently one of the lowest in Europe. However, if the rumour mill is to be believed, the coalition government may soon hike the standard rate by as much as 2.5% to bring it in line with our Euopean cousins. Apparently this move alone would help to raise upwards of £12 billion towards our country's monstrous deficit.
What will it mean for you?
While a hike in the standard VAT rate may be good for the coalition government’s coffers, it may not be such good news for you and me.
VAT is automatically included in the price of almost everything we buy and a rise from the current rate of 17.5% to 20% will essentially mean a price increase of 2.5% across the board. That's the rough equivalent of 2.5p on every £1 you spend.
For example, this would mean:
- a 37” Plasma TV currently costing £399.99 would cost £408.50
- a CD currently costing £4.51 would cost £4.61
- a short back & sides at Luigi’s costing £10.99 would cost £11.22
What about zero rated goods and services?
Of course, VAT is not charged on all goods and services and there are a number of exemptions, including:
- some food
- newspapers, magazines and books
- footwear and clothing for young children
- special exempt items such as equipment for disabled people
Items that fall within these categories are effectively ‘protected’ as charging VAT on essentials like food could have a detrimental affect on those who are most vulnerable.
However, if the rumours are to be believed then the coalition government is considering ending the VAT exemption of some of the above goods.
Such a move would prove highly controversial, but when you consider that we spent £71.5 billion on food last year, you can see how attractive this would be for a government looking to reduce a record deficit by any means.
Who will it affect?
Unfortunately, anyone that lives, and spends money, in the UK will be hit by a rise in VAT - it's inescapable. VAT is the only tax that everyone has to pay, irrespective of their financial situation. Economists estimate that an increase to 20% VAT could cost someone on average wages around £150 each year.
However, the fears are that any increase in VAT will have the greatest impact on those who are on lower salaries . This is because it will account for a greater amount of their income than those on better wages.
Retailers like Tesco are already warning that any rise in VAT could also delay the recovery of what is already a fragile economy. If sales continue to fall then jobs in the retail sector could be put at risk as people tighten their belts and cut back on their spending.
There is also concern that any rise in VAT would have the knock-on affect of forcing inflation up, which could again have a negative affect on the economy.
There’s bad news and then there’s even worse news
It’s an old trick, but if you are planning on breaking some bad news, try leaking some even worse news first. This will have the effect of making the bad news seem slightly better when it eventually comes to pass.
Based on this assumption, you could well find that come Tuesday we might only be facing a VAT increase of 18.5%, as opposed to the rumoured 20%. It could even end up being deferred until next year. We shall just have to wait and see!
Either way an increase in VAT at some stage in the not to distant future does appear to be on the cards.
So if you were planning on making a major purchase in the coming weeks and you currently have the funds available, buying now could represent a significant saving.
