Possible tax rises have been high on the election coverage agenda as each of the parties sets out their plans for reducing the budget deficit, but little so far has been made of any hike in VAT.
The standard rate of VAT is currently 17.5 per cent, a level to which it returned in January after a recession-driven, year-long drop to 15 per cent.
For any new government, a rise in VAT would provide a welcome boost to income, one that would be repeated on an annual basis.
VAT is the third most significant source of revenue, behind only income tax and national insurance contributions.
It is estimated that a 1 per cent increase in VAT would provide an extra £4.5 billion for the Exchequer. That is the equivalent of one pence on income tax and more than the planned 1 per cent rise in national insurance contributions.
Were VAT to rise to 20 per cent, it would deliver an additional £11 billion a year to the Treasury.
However, the three main political parties have remained more or less silent on any future change to the rate of VAT.
Labour has promised not to extend VAT to those essential goods – food, children’s clothes, transport and books – that are zero-rated but not to rule out an increase for all other items. The Conservatives omitted VAT from their manifesto. The Liberal Democrats mentioned the tax just twice in their list of pledges but have insisted that they would not raise the rate.
There are concerns that an increase in VAT, which is a consumer tax, could fuel inflation.
But a number of analysts are predicting that the next new government may have to give serious consideration to a higher rate of VAT.
