Business backs call to raise VAT to 20% in emergency Budget

Jun 15, 2010

 

A total 61% of the 202 executives polled by Opinion Leader Research on behalf of business advisers KPMG said that on the assumption that tax rises would be necessary in the Budget, a VAT rise would be the best option for their business. A National Insurance increase is the least preferred option according to those surveyed.
 
But according to KPMG’s quarterly survey of national business confidence, this may miss the point on the potential impact of a VAT rise on the economy.
 
A rise to 20% from the current 17.5% rate would generate around £1 billion per month but KPMG estimates that the average UK hopusehold would be £425 a year worse off.
 
 
 
 
Richard Watson, head of tax at KPMG’s Milton Keynes office, said:  “Despite the coalition’s silence on a possible VAT rise to date, it is surely a tempting target given its revenue raising potential. The big unknown, however, is the potential risk that such a move could stifle consumer spending and thus hamper the recovery.”
 
“VAT is seen as the lesser of the tax evils because it is an indirect tax paid by consumers. So to a certain extent, it is a ‘wash-through’ for companies operating in a predominantly business-to- business environment.”
 
However, those operating in the business-to-consumer markets such as retail, financial services and hospitality would see the increase passed on to the consumer or being absorbed by suppliers, squeezing their margins.
 
Looking at other options should tax rises be announced in the emergency Budget on Tuesday, direct taxes borne by businesses were the least popular among the sample, with a rise in National Insurance the worst according to 39% of respondents.  This was followed by a rise in corporation tax, cited by 29% as a bad move.
 
 
According to KPMG, key priorities for the coalition government to help nurture businesses in the UK should be to create a competitive tax system and to incentivise and encourage businesses to invest and grow here.
 
Mr Watson said:  “As we embark on this fledgling recovery, some extra stimulus to help businesses thrive would be welcomed.  Despite the government’s intention to reform the overall business tax system by ‘simplifying reliefs and allowances’, now could be the time to enhance the existing incentives such as research and development tax credits and the capital allowances regime while embarking on a full consultation process on the wider simplification and reform package.”
 
Confidence among Britain’s businesses has continued to rise in the wake of the General Election, with 59% believing that the new coalition government will have a positive impact on the UK’s corporate environment. 55% of businesses rated their prospects for the next 12 months as good or very good, compared to 44% at the end of 2009. 
 
Mr Watson said: “It is encouraging to see such confidence and optimism returning to the British business community, and the views on the new coalition will no doubt be welcomed by the government. However, this could just be a ‘honeymoon period’.  With very strong signals from Whitehall that some painful measures are on the way, it remains to be seen whether such an upbeat mood will last long.”
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