VAT Rate Change

Since the UK VAT rate change was announced on Monday, thousands of people from financial experts to the average bystander have chipped in their opinions. Many of the opinions have been cautious, and some have been just plain negative, and for good reason... Benefit To Low-Income Families One of the key claims surrounding this VAT rate cut is that it will benefit low income families. What the government seem to have failed to realise is that by its very nature, VAT cuts are likely to benefit low income families the least of all. A large percentage of many low-income families' income is spent on the essentials - Gas, Electricity, Water, Food, Children's clothing etc. All of these are either zero-rated items (food, children's clothing) or reduced rate items (gas, electricity). These items do not receive a reduction in their VAT rates, and so, there will be no reduction in the price of these. Article Continues Below: Alcohol, Tobacco and Petrol/Diesel While the VAT reduction does apply to Alcohol, Tobacco and Petrol/Diesel, the government has been underhanded about these items. They have raised the duty on these items by 2.5% - effectively keeping the cost the same on these items as they are current. Additionally, when the VAT rate returns to normal at the end of 2009, the duty increase on these items will remain, essentially causing a 2.5% raise in the prices of these items. Repaying the Debt, or How To Scam A Country It is widely accepted that the country will have to repay the deficit created by this VAT cut at some point. The 5% raise on income tax for high end earners would generate around £1.5 billion a year - which means it would take around 10 years to cover the VAT deficit created in one year. The government have already been forced to admit they were 'considering' raising the VAT rate to 18.5% in 2011. While it has been claimed this was considered but 'rejected', it still got far enough to be included and signed for on official documents. There is real reason to suspect the government will go ahead with these plans at some point - not only because they would generate an extra £5 billion a year! Add to this the fact that NI contributions will rise for everyone in 2011 as well, and you start to wonder if the government even realise there is a recession on.