Darling Misses A Revenue Trick With VAT

by Jason Gorringe, Tax-News.com, London

28 April 2009

By not increasing the rate of value-added tax beyond the anticipated return to the 17.5% rate, Chancellor Alistair Darling has missed an opportunity to raise billions of pounds per year in tax revenues to reduce the budget deficit, according to BDO Stoy Hayward.

The standard rate of VAT in the UK, currently 15%, is due to return to its former level of 17.5% at the end of this year after being reduced by the government following the pre-budget report in November. BDO calculates, however, that increasing the rate to 19.5% could raise an additional GBP10bn (USD14bn) per year in tax revenues.

"Such an increase would also have created a significant stimulus for consumers to bring forward expenditure to before the end of 2009 and would have assisted those in receipt of pension annuities by lifting RPI (retail price inflation) out of negative territory in 2010," said Marc Welby, VAT partner at BDO Stoy Hayward.

With the state of the government's finances worse than expected, Darling chose to raise new revenues through the creation of a new 50% tax bracket for those on annual incomes of GBP150,000 or more (up from 40%). He also announced several new compliance measures, including a disclosure facility for those with undeclared offshore accounts, and tougher information requirements for tax evaders.

Welby added: “The Chancellor’s inaction on VAT has come as something of a surprise – the political and economic climate has perhaps never been better for the bitter pill of a VAT increase to be swallowed. Furthermore, that pill could have been sweetened by a reduction in corporation tax to 25% - this would have helped the UK in its bid to remain tax competitive and still have left the Chancellor with a net GBP6bn per annum to help reduce the historic budget deficit.”

Total government tax receipts in 2008/09 were over 9% below the Chancellor's forecast made only five months ago in the pre-budget report. The outturn of GBP496bn for 2008/09 fell GBP50bn below target - a shortfall exceeding the combined government spending on transport, housing and the environment.

Income tax revenues were over 10% below forecast at GBP141bn, undoubtedly due in large part to shrinking City bonuses and higher unemployment.

However, more worrying was the 23% fall in corporation tax receipts to GBP45bn which, as the Chancellor acknowledged, reflected a general reduction in profitability over almost all sectors of the economy.

The reduction in VAT receipts by 22% to GBP64bn was also dramatic, although this was partly due to the temporary reduction in the standard rate by 2.5% from December 1, 2008.

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