Friday, 13 August 2010

VAT increase fun

Both Labour and the Tories had been mumbling about the merits or otherwise of increasing our standard rate of VAT to twenty per cent for a year or two, but without any firm plans to do so and it was in neither party's manifesto. However, the Lib Cons had only been in government for a few weeks before they announced that VAT would be increased to twenty per cent with effect from January 2011.

I should have seen that one coming, really. From EU Reporter, 13 February 2010:

The European Union is harmonising VAT across the 27 member states. A 20 percent norm will be introduced probably by June with registration also likely to be harmonised at the Belgian standard of €5000 earnings per annum.

New cross-border rules introduced on January 1 will prove a cash cow for troubled national exchequers to be followed by harmonised rates and registration. The moves, last stages of which are going through the European Parliament and Council of Ministers will provide massive liquidity injections to countries with lower rates such as Britain and Germany...


The increase in the rate would be bad enough, but reducing the UK registration threshold from £70,000 to £4,000 or so is going to be mighty unpopular with the 'small and medium-sized business sector'. The upside for the EU is that Member States' contributions to the EU budget are (partly) proportional to their VAT receipts; so the EU will get a bit less from Ireland, Greece, but a heck of a lot more from the UK, Germany.

11 comments:

Bill Quango MP said...

Changing the registration would probably bring a backlash sufficient to fracture the coalition.

Blue Eyes said...

Is the limit really £70,000 at the moment? For some reason I thought it was much nearer to £5000. This is a genuine question not an attempt to contradict.

Rational Anarchist said...

from 1.4.10, the limit has been £70,000:

from the HMRC website

Anonymous said...

@ Blue Eyes

The registration threshold is currently £70,000. For certain businesses (chipshops and hairdressers) being noteable examples, the marginal rate of tax on the 1st £1 over the threshold is about 10,000% they would lose around £10,000 unless they can increase their turnover to about £83,000. Because the pricing of these activities is very inelastic the current best course of action if you feel you cannot reach such a high level of turnover is to reduce opening hours and artificially maintain turnover below the threshold.

20% VAT along with an extremely low registration threshold like £4,000 is with a good deal of certainty, going to close down A LOT of businesses. The net effect being to increase unemployment and not raise anywhere close to the predicted tax revenues due to making the change. The predicted increase in revenues is £13 billion, when Darling put VAT down to 15% a similar figure was expected as lost revenues, the actual loss was only about 2/3 of the predicted figure because a lot of businesses did pass on the rate cut to prices which stimulated consumer spending.

Ed said...

Anonymous, I always expect the system to be stupid but it is still depressing that it is quite that stupid.

The reduction in the threshold would indeed be a very bad idea for small businesses. Let's hope some sanity prevails and we don't bother to implement any such EU regulation.

Mark Wadsworth said...

BQ, that's a tricky one isn't it? Whine about the 'banks not lending to SMEs' and then let the EU crush them?

BE, Anon nails it.

Ed, whatever threshold you set, it's bad - £70,000 is incredibly generous by EU standards, but as Anon explains, such a high threshold acts as a massive barrier to growth - which is what the EU is all about - raising barriers to entry to protect the large corporates with lots of lobbyists.

Bayard said...

BQ, one can but hope. However, there's not much chance of the next government being any less cartelist than the present one.

Ed said...

such a high threshold acts as a massive barrier to growth

I know you want to eventually eliminate VAT, but in the short term we could at least choose to only apply VAT to revenue above the threshold.

Mark Wadsworth said...

Ed, that would be one way of doing it - it would be like higher rate tax income tax that only clobbers the top bit.

Budvar said...

The £70k threshold is based on turnover, and the proposed threshold of £5k is based on earnings. 2 completely different yardsticks.

Mark Wadsworth said...

Budvar, the article refers to "earnings" but it means "turnover". I do this for a living.