The Chancellor should not play VATman

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date: 11 June 2010

embargo: 00.01hrs Monday 14 June 2010

Increasing VAT in the emergency Budget would hit the poor more than the rich, cost small firms more than big ones, threaten retail jobs, increase tax avoidance and boost inflation, which could in turn lead to higher mortgages, according to a new TUC briefing published today (Monday).

The briefing, available at www.tuc.org.uk/VAT, says that while tax increases should play a more significant part in deficit reduction than the Chancellor plans, VAT is one of the least progressive ways to do this, as:

  • The poorest fifth of households spend twice as much of their disposable income on VAT as the richest fifth. While items important to less-well off households such as food and children's clothes are exempt, so are private healthcare, private education and financial services that are mainly used by rich people.
  • Only businesses with sales of more than £70,000 a year register for VAT so unregistered small firms pay the tax without being able to claim it back.
  • Unlike small businesses, large companies avoid VAT by setting up subsidiaries in tax havens because items costing less than £18 - such as CDs and DVDs - can be imported into the UK free of VAT. This already costs UK taxpayers £100 million a year. Increasing VAT would provide further incentives for tax avoidance and threaten retail jobs in the UK.
  • Increasing VAT would feed directly through to inflation, which is already over target. Banks could increase interest rates as a result which would lead to higher borrowing costs for companies and bigger mortgage bills for consumers.

TUC General Secretary Brendan Barber said: 'The Chancellor should resist the temptation to be VATman when he presents his Budget. VAT increases don't just hit the poor more than the rich, they also hit small firms, threaten retail jobs and by boosting inflation could also lead to higher interest rates.

'There are much fairer ways to raise revenue such as a Robin Hood Tax on financial transactions and Capital Gains Tax. The only VAT changes the Chancellor should contemplate are ending the zero rates on private healthcare and education that only the rich can afford.'

NOTES TO EDITORS:

- All figures are taken from the TUC briefing except the household costs of VAT, which are taken from http://www.statistics.gov.uk/elmr/08_09/downloads/ELMR_Aug.pdf. According to the Office for National Statistics, the poorest fifth of households pay 12p in VAT for every pound of disposable income they spend, while the top fifth pay just 6p.

- All TUC press releases can be found at www.tuc.org.uk

- Register for the TUC's press extranet: a service exclusive to journalists wanting to access pre-embargo releases and reports from the TUC. Visit www.tuc.org.uk/pressextranet

Contacts:

Media enquiries:
Liz Chinchen T: 020 7467 1248 M: 07778 158175 E: media@tuc.org.uk
Rob Holdsworth T: 020 7467 1372 M: 07717 531150 E: rholdsworth@tuc.org.uk

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