5:46pm UK, Tuesday January 04, 2011
VAT has gone up 2.5% in a move that the Treasury hopes will raise an extra £13bn in tax.
The increase will see the rate rise from 17.5% to 20% - meaning an extra 2.13p added ito products that had previously been sold for £1.
Officials hope it will help reduce the deficit between government income and expenditure which is forecast to reach £155bn by the end of 2011.
It is expected the price of a litre of petrol will increase by an average of 3p, and a television which previously sold for £450 will be subject to another £10 in VAT.
The taxman will take another £320 on a mid-range car which was priced at £15,000, but there should be no change to prices for food and children's clothes which are exempt from VAT prices.
VAT Rate Increased To 20% To Aid Budget
5:46pm UK, Tuesday January 04, 2011
VAT has gone up 2.5% in a move that the Treasury hopes will raise an extra £13bn in tax.
The increase will see the rate rise from 17.5% to 20% - meaning an extra 2.13p added ito products that had previously been sold for £1.
Officials hope it will help reduce the deficit between government income and expenditure which is forecast to reach £155bn by the end of 2011.
It is expected the price of a litre of petrol will increase by an average of 3p, and a television which previously sold for £450 will be subject to another £10 in VAT.
The taxman will take another £320 on a mid-range car which was priced at £15,000, but there should be no change to prices for food and children's clothes which are exempt from VAT prices.
idealogical divide over Vat increase
Chancellor George Osborne on the VAT increaseVAT is a powerful weapon to tackle debt and if we don't use it then the spending cuts would be over £13bn pounds bigger
Different retailers are making varying promises about absorbing the cost of the VAT increase.
Debenhams said it will only start to charge the higher VAT rate on new season stock; Tesco said it would freeze the price of all non-food products until January 25th; Asda said that its customers would "hardly notice a thing"; while Superdrug has promised to freeze prices on all its own-branded goods.
Retail analyst, Natalie Berg told Sky News: "The obvious impact of not passing on the VAT is that their profit margins will take a hit as a result - the majority of retailers will look to pass on the VAT rise to consumers in some shape or form."
But she said that many shoppers are unlikely to notice a difference. "Often the psychological effect is greater than the reality.
"A few years ago the Government reduced VAT as a way to stimulate spending and nobody really noticed.
"It's only now that prices are going up that shoppers are taking an interest."
The previous government's discount VAT rate of 15% came to an end last January after it failed to stimulate consumer spending as had been hoped.
Wrong tax, wrong time? Labour leader Ed Miliband
But the Labour leader Ed Miliband said that increasing VAT again is "going too far too fast".
"When family budgets are already squeezed, now is not the time for a VAT rise to make it even harder to make ends meet," he said.
He said the Government should apologise for "misleading" voters as both parties said they had no plans to increase the tax.
"George Osborne should stop treating the British people like fools," Mr Miliband told reporters.
"He claimed that this VAT rise was fair - but David Cameron admitted before the election that VAT rises were unfair.
"Everybody knows it's poor and middle-income families that will be hit hardest."
But the Chancellor, George Osborne denied VAT was a less progressive tax than other options and said his policy of debt reduction would restore confidence in the economy.
He said: "Labour left Britain with record debts that people know we have to deal with to avoid an economic crisis.
Retailers have announced differing responses to the VAT change
"VAT is a powerful weapon to tackle debt and if we don't use it then the spending cuts would be over £13bn pounds bigger."
Retailers and service providers warn that thousands of jobs will be lost when they are forced to increase their prices.
The Office of Budget Responsibility has concluded that the increase will shave 0.3% off economic growth of between 1.5 and 2% for the next year.
"There's no way I can see it pushing us into a double dip but it is a lot of money going out of the economy," George Bull, Head of Taxation at Baker Tilly told Sky News.
"The Chancellor has been thinking out loud about whether the private sector could could take up some of the slack in job losses caused by public sector spending cuts," Mr Bull said.
"But if the shadow Chancellor is right, the VAT increase is going to suck out the capacity from the economy to increase jobs."
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