22 June 2010

• Government could raise VAT to 20%
• Could add over 2% to prices in the shops

Increasing VAT from 17.5% to 20% at the Budget on 22 June could trigger a sharp rise in inflation, potentially putting the recovery at risk, says our specialist VAT partner, Simon Newark.

According to our research, increasing VAT from 17.5% to 20% could mean high street prices jump by over 2% as retailers pass on the increase to consumers. 

We also must highlight that increasing VAT would exacerbate cashflow problems for businesses and could also reduce the capacity of banks to lend. 

Increasing VAT to 20% would bring in between £11 billion and £12 billion a year.

With the need to reduce the deficit, and the UK VAT rate among the lowest in the EU, the worry is not only that it will be seen as politically expedient for the Government to justify hiking VAT to 20%, but the Chancellor realistically only has once chance to get away with it by blaming the previous Administration, and that is now.

Simon Newark, our VAT partner, comments: “A VAT hike could push up prices on the high street by around 2%, which would have a very significant impact on inflation. Higher inflation could trigger interest rate rises, risking the spectre of the ‘double-dip’ recession.”

“For businesses which cannot reclaim VAT, such as banks, it will directly hit their bottom line. Given the weak state of the banking sector and the ongoing reluctance of banks to lend to SMEs, a VAT hike could further reduce lending to the small business sector.” Charities will also suffer and a raise in VAT will simply add to their costs and reduce the funds for charitable projects.

“Even businesses which can reclaim VAT will suffer. Higher VAT will eat into cashflow, which could push some businesses into insolvency.”

He adds: “Businesses will have to change their accounting and invoice systems for the third time in two years, which will involve additional significant costs.”

Simon Newark