Will VAT at 17.5% Seem “Low” Soon?

How long before the UK has a 20% VAT rate? Most of the major EEC economies do already!

Stefano Pessina, executive chairman of Alliance Boots anticipates a crippling rise in VAT after the general election. He said this week in a newspaper interview that he is pretty much resigned to a rise in VAT as governments around Europe seek to reduce their fiscal deficits with revenue raising measures.

Britain has more scope to raise the rate than most, as at 17.5 per cent from Jan 1 2010 , the UK threshold will still be lower than the European average of just under 20 per cent.

“Governments won’t be able to resist it”, Pessina says. “VAT provides the easiest way of raising large quantities of additional tax in what the politicians would see as a relatively uncontroversial way. Much less incendiary than raising income tax or cutting benefits.”

In a competitive – and relatively low inflation environment – retailers will struggle to pass the planned increase on. Stephen Whitlam, Head of Banking in the UK for Expense Reduction Analysts, feels that retailers in particular will need to focus on cost control ever more stringently. “We have had great success in making significant inroads into reducing the ‘per transaction’ overheads of our retail clients in areas such as Secure Cash Handling, Cash Processing and, particularly, Merchant Card costs” Stephen said. “The difficulty that even the largest retailers have is knowing precisely where the market is in these cost areas. Tariffs are rarely published as individual negotiation is the norm. And that dynamic knowledge is a very particular strength of ours”.