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Budget 2010: changes to VAT

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One of the headline announcements of chancellor George Osborne’s Budget was the VAT increase. This was expected by most pundits – what does it mean for you?

Chancellor George Osborne said:

“The years of debt and spending make this unavoidable. On 4th January next year, the main rate of VAT will rise from 17.5 per cent to 20 per cent. This single tax measure will by the end of this Parliament generate over £13bn a year of extra revenues. That is £13bn we don’t have to find from extra spending cuts or income tax rises. 

“I can also give this House a commitment that we will keep everyday essentials such as food and children’s clothing, as well as other zero-rated items like newspapers and printed books, exempt from VAT over the course of this Parliament. My Budget today includes no new increases in duties on alcohol, tabacco or fuel.”

The short version:

VAT will rise from 17.5 per cent to 20 per cent from the start of 2011. No change on duty in alcohol, tobacco or fuel.

We say:

Chancellor George Osborne’s announcement that VAT will rise from 17.5 per cent to 20 per cent didn’t come as a surprise. 

George Osborne had a choice of increasing VAT on existing items, or to introduce VAT on VAT-exempt products such as food, newspapers, books, etc. Although this would have raised substantially more cash for the Treasury’s coffers, he made the right choice: introducing VAT on zero-VAT items (which are mostly essential items) have hurt the poorest.

Also, as we saw with the VAT reduction, a change of 2.5 per cent in the price of consumer goods has little impact on consumer spending. Additionally, most B2B businesses will still be able to claim the VAT back.

Entrepreneurs’ reactions:

Charlie Mullins, founder of Pimlico Plumbers: “To be honest, I thought it would have gone up [overnight]. VAT was a ‘no brainer’ of a rise – it had to happen.”

Gavin Ucko, founder of The Happy Puzzle Company: “As a mail order company, price points are incredibly important for us – £9.99, £12.99, etc. The 2.5 per cent  increase in VAT will create a very real risk of psychologically switching off the consumer from the product. It creates a situation whereby we are reliant on the goodwill of our suppliers to take this increase into account. If they don’t, we have a problem. Whilst we understand the need for this increase, ultimately the burden of the rise falls on the retailer, not the shopper.”

Marcus Dyson, CEO of internet app developer Eleventeenth: “The VAT increase will of course have an impact on spending and therefore the economy at large, but in reality there is no-one who is contemplating purchasing a £1,000 HD TV who will rethink now that it’s £1,025. And the deferment until next January means that it won’t affect the pre-Christmas shopping season.”

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