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04 January 2011 Salman Shaheen - ITR
The rise in UK VAT to 20%, which was announced last June, came into effect today. But while the government and opposition are debating the pros and cons of the controversial move, many other European jurisdictions are following the same trend.
The UK opposition Labour Party has attacked the rise for its impact on families and the 250,000 jobs it may cost, while Chancellor of the Exchequer, George Osborne, defended the move as the “least damaging” means to tackle the budget deficit.
Whether raising VAT is the least damaging means to tackle the deficit in the context of the UK’s fragile economic recovery remains open for debate as it will have an impact on consumer spending, retail profit margins and the real estate sector, but it is clear that other governments see putting up the tax as the easiest option politically.
Eight other European countries are raising their VAT rates this week, including Switzerland, from 7.6% to 8%; Portugal, from 21% to 23%; Poland, from 22% to 23% and Slovakia, from 19% to 20%. Spain and Portugal also raised rates last year, along with Finland, where a further increase to the EU maximum of 25% may be proposed.
Impact
The UK government expects to raise £13 billion ($20 billion) from the change, however one adviser is concerned about its impact on the retail sector.
Richard Baxter, head of indirect tax at Alvarez & Marsal Taxand UK, is more concerned about the impact on the real estate and banking sectors.
“All the focus has been on retail but it is often forgotten that in addition to the poor consumer, banks, insurance companies, hospitals and real estate groups are the sectors most adversely impacted by the VAT increase; it will add significantly to their cost base,” Baxter said.
Trend
One of the main reasons European governments are pushing up VAT is to pay for falling corporate tax rates as countries compete to attract foreign investment. The same budget which introduced the UK’s VAT rise also introduced an annual cut in corporation tax by one percentage point until 2014.
“The UK is in good company this week with its VAT hike,” said Richard Asquith, head of VAT at TMF Group. “International governments had been plotting for many years to raise indirect taxes such as VAT to subsidise cuts to job-creating business taxes... We can expect more increases in 2011 as more countries come under financing pressure.”
The trend towards rising VAT rates across Europe and the rest of the world looks set to continue.
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