Higher VAT day arrives

January 5 is going to be one of those days that ‘goes down in infamy’ for many in the U.K, as it marks the increase in VAT from 17.5% to 20%, where it is probably going to stay until it goes up again.  Despite the hopes of the Federation of Small Businesses (FSB) that the rate may drop back at some point in the deficit reduction, Chancellor George Osborne has stated that the rise will stay in effect indefinitely, certainly to 2015.

The increase in VAT is a major part of the government’s attempt to reduce the national debt; the change was announced back in June but from the sounds of it, most businesses and individuals haven’t really gotten behind it.  The tax will affect almost every purchase, with the exception of necessities such as food, children’s clothing and newspapers.  It is expected to bring an additional £13 billion into the government’s coffers in the next financial year beginning April 1.

The FSB argues that the increase will hit retailers the hardest, as they are less able to absorb the cost and will have to pass it along to customers in one way or another, chiefly in higher prices.  They said that over half of their members expect to raise prices, and a large percentage is expecting a drop in sales and loss of customers.

The government’s argument has always been that the increase in VAT is preferable to raising income taxes or national insurance rates.  However, another argument suggests that an adjusted VAT rate similar to that of income tax would be a possible alternative to the overall 20% rate.