New research proves VAT hits the poorest hard

The poorest fifth of households in the UK spent a higher proportion of their expenditure on goods and services that attracted Value Added Tax (VAT) in 2009/10 than in 1986.

That's the conclusion of research out today from the Office for National Statistics (ONS).Overall, the data shows the poorest fifth of households in the UK pay more in VAT as a percentage of their disposable income than the richest fifth.

However, the analysis highlights changing spending patterns. Poorer households in 1986 spent a smaller proportion of their expenditure, than poorer households in 2009/10, on discretionary items which attracted VAT.

For example, after taking into account changes in prices, the poorest fifth of households spent, on average, around 250 per cent more on new cars, holidays abroad, meals out, audio/visual goods (including TVs) and photographic equipment combined in 2009/10 than in 1986. This is compared with an increase of 20 per cent for the richest households.

The analysis reveals that in 1986, the poorest fifth of households spent 55 per cent of their weekly expenditure on non-VATable items, compared with 45 per cent on VATable items. However, in 2001/02, this pattern had reversed. The poorest fifth of households spent, on average, 42 per cent on items which did not have any VAT levy compared with 58 per cent on items which did.

In 2009/10 this reversal was still evident, although to a lesser extent, as the poorest households spent, on average, 45 per cent of their total weekly expenditure on items which did not attract VAT, compared with 55 per cent on those which did. The research extends to 2010, but does not include the current 20 per cent rate of VAT introduced in 2011.

For the richest fifth of households there was no marked change in the proportion of their expenditure on VATable compared with non-VATable items over the period.

Not £ 50 nearer £10,000

I am sure that there are going to be many of this stories around but this from the Manchester Evening news caught my eye.

The treasury said that the change in VAT rates would cost small business just £10, and larger ones up to £500. For one Manchester business though it was nearer £10,000...........

FirstFound, a search engine consultancy based on Oxford Street, has spent the money to ensure its customers are paying the correct fees.
Owner Chris Bellamy said: "I've had to create 68,000 new invoices and credit notes, and email them to 6,000 different customers. I've got 2,300 customers who pay by standing order and are now paying the wrong amount, so I need to address that as a matter of urgency too."

Germans are snubbing Brown but maybe there is a way to pay for the deficit

Gordon may have saved the world but the Germans don't appear to be taking too kindly to his plans for world domination.

Chancellor Angela Merkel is none too happy about being snubbed on Monday by Brown,Sarkozy and Barossa and the German finance minister has let it be known that he thinks that our fiscal stimulation package.

In an interview with Newsweek magazine, Peer Steinbrueck singled out Prime Minister Gordon Brown for abandoning fiscal prudence and switching to policies that would saddle a generation with debt.

The finance minister seems particularly unhappy that having been lectured for 10 years by Brown about the need for fiscal prudence,our Prime Minister has engineered a complete about-face.

Over in the Times this morning,Anatole Kaletsky has a possible solution to the problem of paying for the increasing deficit

There is one type of tax crying out to be raised in the present environment because it would actually strengthen the economy. This is a tax on energy, carbon or fossil fuels.

According to Anatole

The simplest version of such a tax is the “escalator” whereby the Treasury committed itself in the mid-1990s to raising petrol duties by 5 per cent above inflation each year. In the past three years, this escalator has been suspended to offset the effects of soaring global oil prices.

An unnecessary reduction

You have noticed that this blog is becoming a little cynical about the government's attempts to mitigate the impending financial gloom.

You would be correct.That doesn't mean that we agree with the Cameron view of do nothing.Far from it it fact there may be a case for greater and more controlled intervention.

But what will not help is the tinkering around with financial tools and none more so than the 2.5 per cent decrease in VAT.

Over at Westminster Blog,Jim Pickard reports on the comments of former GOAT Digby Jones who says

“The accent in the pre-budget report was on stimulation of the consumer. However, regardless of a VAT reduction, people will not go shopping for big-ticket items when they are out of work.”

In my opinion,all this has done is create a great deal of confusion and administrative mess for companies.The fact that retailers are already discounting prices well below the 2.5 per cent shows the reality of the situation.

An unnecessary reduction which will be paid for in future years

The VAT Squabble

The row over VAT is going to make both PMQ's and this afternoon's debate on the PBR quite interesting.

It seems that the release of the document was a complete cock up.Sure the government was considering all options for getting public borrowing back into line after the economy starts to grow but raising VAT with all its implications was dismissed,probably at the last minute

It is reported that Alistair Darling is fuming over the Tory reaction and launching this afternoon's debate he plans to accuse the opposition of scaremongering

More on the VAT debate.

Further to my most this morning on the VAT question,there seems plenty of discourse in the blogosphere as to why it is a bad idea.

John Redwood says that

Just about the worst tax cut they could design is a VAT cut. It’s costly on the revenue, but will have little impact on the problem. People do not feel well off. Offering them 2.5% off dearer items at a time when the shop and showroom prices are already 10-20% down is not going to do much.
It’s not fair on the poor. Essentials that make up most of the budgets of the lower paid are already VAT free. The biggest gains will be for those who buy expensive wines, flashy cars and use lots of petrol. If markets do not like the borrowing figures we will lose more from the higher long term rates of interest the markets will demand of the government.

He prefers an income tax cut as a way of redistributing tax revenues on a fairer basis.

Over at Coffee House James Forsyth is

unconvinced that a cut in the VAT rate will be that big a political winner for Labour. First VAT is a hidden tax, a lot of the time people don’t realise they are paying it as it is incorporated in the price. Second, sterling’s weakness means that imports are going to become more expensive regardless of this cut.

Will the VAT reduction work?

All the papers this morning expect Alistair Darling to cut VAT tomorrow.

Agian the move shows just how serious the governemnt feels the economic outlook to be.

The chancellor is constrained by the European union rules which mean that the cut will be limited to 2.5%.

The move will be seen as a way to boost pre Christmas sales in the shops following a week of bad retail data

Estimates are that this will cost anything between £12-18b and of course at some point the rate will need to be put back up.

Will it work?Jim Pickard thinks that it may not

Many household products - food, newspapers, children’s clothing - are already exempt. Fuel is paid at much lower rate.
As for products on which VAT does apply: would people be more likely to buy a fridge/hi-fi/wardrobe if it costs £115 instead of £117.50?

and furthermore

there were deep discounts (typically 20 per cent) taking place this week at M&S, Debenhams, Dorothy Perkins, Wallace, BHS, George at Asda and House of Fraser - amid fears of imminent corporate collapses elsewhere in the sector.

Brown's VAT proposals grounded in Brussels

Mark Mardell reminds us of something that occuured in the EU a couple of months ago when Gordon Brown managed to persuade the other leaders to look into cuting VAT on environmentallly friendly goods.

Unfortunately as Mark reveals it has become stuck in the mud so to speak

Many at the time thought the leaders and the Commission were willing to give him the headline, but precious little of real value.
British diplomats haven't been told by Downing Street to push the idea, and currently it's stuck in the office of the commissioner for taxation.
The Commission tells me that this is not a new idea; it is at least two years old.