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Osborne In A Pickle Over UK Pasty Tax

by Robert Lee,, London

31 May 2012

The UK government's u-turn on its unpopular pasty tax and caravan tax proposals could result in a further increase in the standard rate of value-added tax (VAT), experts have warned, calling on Chancellor George Osborne to launch a proper review of the VAT system.

In an effort to remove anomalies in the VAT system, Chancellor George Osborne announced in his March Budget that freshly baked goods, including hot pies, pasties other savouries would be brought in line with other hot takeaway food and charged the standard 20% rate of VAT. He also outlined plans to charge VAT on static holiday homes, which are not at present subject to the tax. In the wake of widespread protest against both measures, the government's decision to back down has been welcomed by campaigners. Now, only food intended to be consumed warm - such as rotisserie chickens sold in supermarkets - will be charged VAT, costing the Exchequer GBP40m (USD62m), while a new special 5% VAT rate will be levied on these caravans, resulting in a further GBP30m drop in projected revenue.

Reacting to the news, George Bull, Senior Tax partner at Baker Tilly said that common sense had prevailed. He added that the taxes would have imposed further burdens on businesses and on the consumer at a time when the economy requires support. However, Bull did warn that the fall in the revenue expected from these measures could result in a further VAT increase later this year. He explained, "With income tax and National Insurance, VAT is one of the 'Big Three' revenue-raisers for the UK Exchequer. With no upper limit on the standard rate of VAT, the autumn Budget may announce an increase to the current rate of 20%, as recommended by the IMF.”

Experts at PwC have called for a proper review of the VAT system, stressing that a simpler and more efficient system must be created. While welcoming the fact that the issue has highlighted anomalies in the system, Stephen Coleclough, tax partner at PwC, said that the proposals "could have caused all sorts of problems and been hard to enforce". Nonetheless, the issues remain, even if the pasty and caravan taxes do not. Coleclough pointed out some of them: "The UK has one of the widest zero-rated VAT bands in the EU and this creates many apparent quirks, for instance caviar is zero-rated while ice cream has VAT at the standard rate but can be zero-rated when part of a cake." He believes that a single rate of VAT should be introduced on food, but one that ensures that the lower paid are no worse off from the changes.

The Chancellor is also now under pressure from members of his own party over another of his Budget tax proposals. He intends to see any individual claiming charity tax relief of more than GBP50,000 be limited to 25% of their annual income or GBP50,000, whichever is greater, a measure charities have warned could cost them millions of pounds in donations as a direct result. Several Conservative MPs have called for the policy to be rethought, the government already having shown that it is willing to respond to taxpayer concerns over the pasty and caravan taxes. Indeed, it has been suggested that government ministers are already working on changes to the plan.

TAGS: tax | business | value added tax (VAT) | United Kingdom | food | tax rates | tax breaks | charities | tax reform

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