VAT : the new 20% standard rate

The Chancellor, George Osborne, presented the Coalition Government’s first Budget to the House on 22 June 2010. In his Budget speech Mr Osborne announced a number of tax increases, as part of the Government’s approach to fiscal consolidation, of which by far the most significant in terms of the amounts to be raised was an increase in the standard rate of VAT, from 17.5% to 20% from 4 January 2011. The increase in the standard rate was estimated to raise £12.1bn in 2011/12, rising to £13.5bn by 2014/15. Introducing this measure, the Chancellor said:

The years of debt and spending made this unavoidable. This single tax measure will by the end of this Parliament generate over £13 billion a year of extra revenues. That is £13 billion that we do not have to find from extra spending cuts or income tax rises. I can also give this House a commitment that we will keep everyday essentials such as food and children’s clothing, as well as other zero-rated items like newspapers and printed books, exempt from VAT over the course of this Parliament.

The previous Labour Government had introduced a one-off cut in the standard rate of VAT to 15%, from 1 December 2008 to 31 December 2009, as part of a fiscal stimulus to counteract the economic recession. At the time it was widely reported that the Government initially intended that the rate would rise to 18.5% in 2010, but decided against this course of action days before the then Chancellor, Alistair Darling, announced it in his Pre-Budget statement in November 2008.

Prior to the General Election in May 2010, there was considerable speculation that the new Government would have to raise taxes to tackle the size of the public deficit, although none of the 3 main parties gave any specific commitments in their election manifestoes to increase in the rates of VAT, income tax or National Insurance contributions (NICs). In its March 2010 Budget, the Labour Government had announced that NICs rates would go up by 1% for employees, employers and the self-employed from April 2011 – and none of the parties proposed reversing these changes in the election.

Although there has been some discussion as to the merits of introducing a second temporary cut in VAT to boost growth, the Government have not indicated they have any plans to amend the standard rate.