Business leaders call on political leaders to be brave with VAT
Any hint of a VAT rise is the kiss of death for a party campaigning to be elected. But Anna Blackaby finds out why many in the West Midlands believe it is a tax nettle which needs to be grasped.
The people of Switzerland recently voted themselves an increase in VAT – a situation hardly imaginable in the UK where politicians go to great lengths to shield the population from this particular tax bogeyman – even if they know a rise is inevitable once whoever forms the next government has got its feet under the table.
Granted, the Swiss only inflicted a small rise upon themselves, from 7.6 per cent to eight per cent, in order to reduce the country’s large disability insurance deficit.
But VAT in the UK is still not as onerous as elsewhere in Europe – the country has the third-lowest standard rate of VAT in the EU at 17.5 per cent, with many other member states adopting a rate of between 20 per cent and 25 per cent, with the average just over 20 per cent.
So it’s not surprising that when faced with the Government’s plans to increase national insurance, a move proving more unpopular by the day with the country’s business leaders, many in the West Midlands are calling for political leaders to turn their attention to upping VAT instead.
Representatives of the West Midland manufacturing sector are among those who have come out most vocally in favour of a rise in VAT over the planned national insurance increase.
The manufacturing industry body EEF recently said an increase in the VAT rate to 20 per cent, which would raise £12 billion a year, would help rebalance UK plc in favour of production by encouraging savings while at the same time weaning the economy off debt-fuelled consumption.
“This additional tax revenue should then be used to mitigate the potentially savage cuts to Government capital spending and mitigate the tax burden on productive sectors of the economy,” it said.
Sue Kirby, of the EEF in the Midlands, said it was vital manufacturers were encouraged to invest in production and staffing – which is why she believes the national insurance “tax on jobs” would be so damaging.
Instead, the organisation is urging Government to look at raising money through the “front end” – ie the consumer end – by using the tool of VAT.
Ms Kirby said: “It’s front end versus back end. It’s whether you want to see production strangled versus consumers making a decision about whether to save.
“Over the last 10 years we have had a buy now, pay later culture. Our view is that by putting the increase on VAT, we are encouraging businesses to invest and encouraging individuals to save and invest rather than spend, spend, spend.
“If you put the increase on national insurance it impacts on everybody – nobody has a choice.
“Businesses and manufacturers, in particular at a time when they are coming out of recession, are looking at potentially recruiting more people.
“Our bottom line is you have to do everything you can to incentivise investment into manufacturing, investment into new capital equipment and delivering productivity.
“If you put barriers in place at that first point, the rest is academic.”
David Caro, who runs the Great Barr-based automotive supply firm Qualplast, said a particular quirk in the way contracts worked in the sector could mean any rise in national insurance would hit firms like his particularly hard.
Mr Caro, who is also West Midland policy chairman for the Federation of Small Businesses (FSB), said the industry had developed a way of working which sees suppliers to big automotive firms forced to bring their charges down on a yearly basis, for example by three per cent a year.
That meant that any unforeseen rise in input costs, such as national insurance, would hit the sector hard.
“National insurance is an increase of the wage bill and that comes off the bottom line and the manufacturers don’t take that into consideration,” he said.
But even though both major parties dismiss the notion that a VAT increase is on the cards, the region’s tax experts simply don’t believe them.
Vince Cable recently had to backtrack on the Lib Dem’s poster claiming a Conservative government would hit the electorate with a “VAT bombshell,” admitting it was based on conjecture – but it is significant that none of the main parties has definitively ruled out a rise.
Jason Croke, VAT consultant at the Birmingham office of Haines Watts, believes a VAT increase is inevitable in this November’s pre-Budget report – whichever party is in power.
“Any political party that promises to be voted in on the basis of VAT going up is probably never going to win an election, but it doesn’t mean that it won’t go up – it’s a question of when and I suspect November.
“Also come November, hopefully the economy will be in a better position to start to tax people a bit more.”
Steve Hodgetts, partner and VAT specialist at Baker Tilly’s Birmingham office, said pledges to leave VAT alone were simply “election sales speaking”.
“The Tories have said they won’t increase VAT, which I think is surprising as it was Mrs Thatcher that raised the rate of VAT to 15 per cent from eight per cent when she came in. That was a huge increase, so we would expect the Tories to increase it.
“Labour are keeping quiet on it.”
Labour are indeed keeping quiet - despite recent reports of a rift in the cabinet which claimed some senior members favoured a rise in VAT over National Insurance.
But in public the party is presenting a united front on national insurance as well as VAT which, charged at a flat rate to everybody, is seen as regressive tax which disproportionately hits the poor. “It is true that it is seen as a tax on the poor,” said Mr Hodgetts.
“But there is an argument to counter that that says that all the necessities are free of VAT, but it would be very difficult to get a shopping basket without cosmetics for example, which do attract VAT.”
