Liam Wiltshire

How does the Government recover the VAT Rate Change Shortfall?

Obviously, in reducing the VAT rate from 17.5% to 15% for a year will create a shortfall in the government’s finances for the year. There are a variety of predictions on exactly how much this will be, however, most agree that it will be somewhere in the region of £12.5 billion. The government will have to make this up in some way or another.

Obviously, in reducing the VAT rate from 17.5% to 15% for a year will create a shortfall in the government’s finances for the year. There are a variety of predictions on exactly how much this will be, however, most agree that it will be somewhere in the region of £12.5 billion. The government will have to make this up in some way or another:

One option the Treasury has considered, but is now denying is to INCREASE the tax rate as the economy recovers. The plans seen on an Revenue and Customs website suggested that

“The proposed changes will reduce this [the VAT rate] to 15% from December 1 2008 until the end of 2009. The standard rate will then return to 17.5% from January 1 2010, and subsequently increase to 18.5% in 2011-12.”

However, they are now claiming that this was only one option that had been discussed, that has since been rejected. It is estimated that this 1% VAT increase could net the Government around £5 billion.

The current plan is to increase the rate of income tax on high earners to 45%. Unlike the estimated £5 billion above, this is expected to recover just £1.5 billion - plus it is likely that many high earners will find ways to avoid paying the extra tax.

The other, as of yet less mentioned part of the plan is the increase in Petrol, Tobacco and Alcohol duty of 2.5%, so these products will continue to cost the same. However, this duty hike will remain in place even after the VAT rate returns to 17.5% at the end of next year, meaning Petrol, Tobacco and Alcohol will actually be more expensive in the long run.

For more information, news and analysis visit: VAT Rate Cut in the UK

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