Government denies secret plan to raise VAT

http://business.timesonline.co.uk/to...cle5236372.ece

Philip Webster, Gráinne Gilmore and Gary Duncan
A fresh Pre-Budget Report row has broken out after it emerged last night that Alistair Darling had rejected at the last minute a move to raise VAT by 1 per cent after the next election.

A Treasury document, inadvertently published on a government website, showed that ministers had recently considering raising VAT from 17.5 per cent to 18.5 per cent in 2011.

A temporary 2.5 per cent cut in VAT, which will expire in January 2010, was announced on Monday.

The Conservatives seized on the leak as proof of that Labour was secretly planning even more tax rises than it had already announced, if it wins the next election.

George Osborne, the Shadow Chancellor, said: “This is Labour’s secret tax bombshell. It explains why there is a black hole in the PBR, because at the last minute Gordon Brown clearly decided to keep secret his plan to hit everyone with an extra tax rise to pay for his borrowing binge.

“These documents show that Labour was planning to deceive the British public, and will raise VAT on everyone after the election.”

The Treasury briefing paper, published mistakenly on the Office of Public Sector Information website, revealed that a plan to increase VAT to 18.5 per cent in 2011-12 was drawn up for ministers as they reached the final stages of PBR consideration.

The PBR cut the rate of VAT from 17.5 per cent to 15 per cent from December 1 for 13 months at a cost of £12 billion. Thereafter it will revert to the 17.5 per cent rate.

But the paper setting out for ministers and officials the rationale for changes said: “The proposed changes will reduce VAT to 15 per cent from December 1, 2008, until the end of 2009. The standard rate will then return to 17.5 per cent from January 1, 2010, and subsequently increase to 18.5 per cent in 2011-12.”

The Times understands that the option was considered as late as last Friday night by ministers, but then rejected.

Peter Mandelson, the Business Secretary, today attempted to dismiss the Conservatives' claims and accused them of “seizing on anything” in order to score political points.

Speaking on GMTV, he said: “I wish they would concentrate instead on the economic situation and what we need to get through what is a very serious economic storm.

“The fact is that the Chancellor has made his policy choice. There were different options before him. He announced on Monday what we are going to do - that was clear and straight for people to understand.

“We hope that, as a result of the action that we have taken, people will spend more, more money having been put into their hands to do so.

“That retailers, shops will respond to the lower VAT rate in order to encourage people to spend more up to their ability to do so.”

The fresh hostilities broke out as independent economists gave a warning that the gains from the new 45 per cent top rate of income tax, one of the measures introduced instead of the planned VAT rise, would be insignificant.

The Treasury is expecting to recoup £1.6 billion a year from increasing the top rate of income tax from 40 per cent to 45 per cent for workers earning more than £150,000 and a further £1.6 billion a year from scrapping the tax-free personal allowance for higher earners.

However, the influential Institute for Fiscal Studies (IFS) said that the 45 per cent rate would raise “approximately nothing”. Higher earners could avoid paying the tax by contributing more into their pension plans, giving more to charity or leaving the country.

Those earning more than £150,000 will face an effective tax rate of nearly 60 per cent once national insurance and other taxes such as VAT and fuel duty are taken into consideration, the IFS said, which would prompt those with high incomes to seek ways to avoid paying the tax.

Accountants agreed that some of the wealthiest people could be tempted to leave Britain to avoid the new tax regime. The Treasury expects that by 2011 about 360,000 people will earn more than £150,000. “There is a real possibility that a proportion of the super-wealthy will decide to base themselves elsewhere. Those with an annual income of more than £1 million will certainly think about it,” Patrick Stevens, tax partner at the accountant Ernst & Young, said.