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4 January 2011
Consumers around Europe are facing new price increases as a fresh wave of VAT rises are introduced this week in the UK, Switzerland and five other countries. They follow a stream of increases in 2010 as governments battled to finance failed banks and burst property bubbles. These increases can be expected to add 1%-2% to inflation rates, and may also raise the potential for fraud.
January 2011 heralds new wave of VAT rises
A total of nine European countries have ratified VAT increases for this week. Most of these rises have been forced through by states anxious to reassure panicked bond markets of their ability to stabilise faltering revenues. Countries include: Portugal, Poland, the UK, Switzerland and Latvia.
This will hit frail consumer confidence, which is already at low levels in most economies as the population worries about a potential double-dip recession with large scale public sector job losses planned in most countries. The UK’s GfK Consumer Confidence figures for December 2010 recorded a twelve month low.
The equivalent German indicator still remains relatively upbeat; the Germans moved their VAT rate up 3% back in 2007, missing the start of the credit crunch.
Ireland has scheduled two VAT increases in 2013 and 2014 to take its VAT rate from 21% to 23%. This was a condition of the ECB-led bail out package. At the end of December 2010, the Finnish Ministry of Finance indicated that it would like to increase its VAT rate to the EU maximum of 25% to fund income tax cuts.
Latest increases come on top of record number of rises in 2010
Over the past 12 months, there have been over 12 increases in VAT rates in Europe as countries have come under the spotlight on the deficit management resolve. 2010 increases have included: Spain, Greece, Romania, Portugal and Finland.
Richard Asquith, Head of VAT, TMF Group, commented:
“The UK is in good company this week with its VAT hike. International governments had been plotting for many years to raise indirect taxes such as VAT to subsidise cuts to job-creating business taxes such as corporation tax and employee taxes. The current economic storm has pushed this ambition upfront. We can expect more increases in 2011 as more countries come under financing pressure.
Another risk will come from the likely increase in VAT fraud, which has dogged the EU VAT system in the past five years, costing billions. These new increases will mean potential higher gains for fraudsters.”
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