Daniel Lyons gives his round-up on the VAT
As had been widely expected, the Chancellor announced an
increase in the standard rate of VAT from 17.5% to 20%. The
change will take effect from 4 January 2011 (the first working
day of the year). The timing of the increase allows businesses
time to plan for it, and slightly mitigates the problems around
implementing the change over the busy Christmas period. However,
the most significant impact of the delay in introducing the
increase is the possibility of a short-term boost to retail
sales leading up to Christmas. The reduced rate of 5% for, among
other things, domestic fuel and power, remains unchanged.
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As happened last year, when the rate returned from 15% to 17.5%, anti-forestalling provisions will be introduced to prevent the 17.5% rate applying to certain supplies of goods and services between connected parties that take place after the 20% rate comes into force.
The Government estimates that the VAT rate increase will raise a significant extra £12.1 billion of revenue in the first full year. We estimate that it will cost the average income family something like £200 per year. Rather more worryingly, analysis provided by the Office for Budget Responsibility suggests that, 'in the short run' the increase will reduce GDP by approximately £4 billion per year.