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VAT rise a temptation for next government

Alan Hawkins

We all recall the fuss when Alistair Darling nibbled 2.5% off the 17.5% VAT rate with virtually no notice and in the run-up to Christmas too.

Nobody but the Chancellor seemed to believe that such a small change would weaken the economic whirlwind. If nothing else, many retailers knew that it would be lost among the changes in new year prices and that some would simply keep their old prices and rebuild their battered margins.

Although we knew the decision would be reversed at some point, BHF-BSSA argued strongly for a delay, calling for the 15% rate to be held until April 2010, if not for a full 15 months until the crisis had abated and recovery had begun. Some fashion retailers, for example, simply decided to bear the pain and apply the higher rate at the end of the Sale season. Others, noticeably in the grocery business, made a big show of holding the old rate -not hard if most of your product is zero-rated.

Now, with the cut reversed and VAT reverting back to 17.5%, we can see it was more significant than it seemed. The BHF-BSSA Quarterly Business Survey reported slightly different levels of increase and decline than might have been expected, because businesses report their figures gross, with VAT included. So a shop reporting a 2% fall in 2009 might simply have been reporting the effect of 15% VAT.

There was definitely a bump in sales of big-ticket items ahead of the rate increase as consumers made their purchases at the last moment, helpfully at Christmas. Now there is a discernible return in the scale of our old foe inflation in 2010, because the prices include VAT. The big question now is this: will our next government be able to resist a 20% VAT rise?

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