The Budget: VAT rise will leave families worse off by £450 a year

Published on Tuesday 22 June 2010 22:41

FAMILIES will be left more than £400 a year worse off by George Osborne's decision to increase VAT from 17.5 per cent to 20 per cent.

• During the General Election campaign, Nick Clegg warned of a Tory rise in VAT; yesterday, he was a leading member of the coalition which announced such a rise would be imposed. Picture: PA

The Chancellor says it will raise 13 billion, and the Treasury's own figures suggest it will mean an average tax hike of about 450 for British households.

The VAT increase was part of a raft of tax rises, which met with cries of "sell-out" from the opposition benches in the Commons.

Labour's jeers were directed at Liberal Democrat MPs, who fought the general election on a manifesto pledging no VAT rises – during the campaign, they accused their future Conservative coalition partners of planning a "VAT bombshell" .

The Tories denied the allegation at the time and said they had no plans to put up the sales tax in their Budget.

That history means Mr Osborne's VAT increase, which will come into force on 4 January next year, is likely to cause tensions among Lib Dem MPs, with some back-benchers angry at the U-turn on one of the party's key election promises.

Gordon MP Malcolm Bruce was the only one of the party's 37 back-benchers to wave his order paper in support of the Budget when the Chancellor wound up his speech.

Labour's acting leader Harriet Harman hit out at the Lib Dems over what she said were measures the party had fought against, but was now supporting in the Commons.

Ms Harman said: "How could they support everything they fought against, how could they let down everyone who voted for them, how could they let the Tories exploit them?"

She went on to say the VAT hikes hitting UK households would "hold back economic growth".

The Treasury admitted the increase for average families would be about 450, but claimed low-income households would be better off.

British Retail Consortium director General Stephen Robertson said the increases would "hit jobs, consumer spending, the pace of recovery and add to inflation".

However, he went on to say the BRC accepted "the government has no easy options".

Meanwhile, Mr Osborne could also face disquiet from within his own party, after he announced higher-rate tax payers will face a ten-point increase in the rate at which they pay capital gains tax.

The rate at which the tax is charged on non-business assets for higher earners increased from 18 per cent to 28 per cent from midnight last night.

The move could prove highly unpopular among the Tory right. Senior Tory back-benchers John Redwood and David Davis had previously raised concerns about any increase, arguing that long-term investors should be given some form of long-term tax relief.

Mr Osborne announced the move to try to narrow the gap between the capital gains tax rate paid by higher earners and the one they pay on income tax – it is aimed to cut down on income tax avoidance.

The threshold at which capital gains tax kicks in will remain at 10,100 this year and will rise in line with inflation in future years.

Basic rate taxpayers will continue to pay the tax at 18 per cent, while the 10 per cent rate for entrepreneurs will apply to the first 5 million of lifetime gains they make, up from the current level of 2m.

The government estimates the move will boost revenues by about 1bn.

Mr Osborne said: "Some of the richest people in this country have been able to pay less tax than the people who clean for them.

"These practices are costing other taxpayers over 1bn every year. It is therefore right, as set out in the coalition agreement, that capital gains tax should increase in order to help create a fairer tax system."

Leonie Kerswill, personal tax partner at PricewaterhouseCoopers, said: "Many taxpayers were worried that CGT rates would be aligned with the highest rates of income tax so will breathe a sigh of relief that the top rate has only been increased to 28 per cent."

In addition, the threshold at which employers start to pay National Insurance will rise by 21 per week from April next year.

Tax relief for the video games industry will be scrapped as part of the austerity measures, but the small companies' tax rate will be cut to 20 per cent.

However, there was also a series of measures the government claimed would help ease the tax burden on the less well-off, in what the Chancellor described as a "progressive" Budget.

Mr Osborne announced plans to help the low paid by raising personal tax allowances, taking an estimated 880,000 people out of the tax system and giving millions of basic rate taxpayers a tax cut of 200 per year.

Corporation tax will be cut next year to 27 per cent, and by one percentage point annually for the next three years, until it reaches 24 per cent.

There was help for local authorities that propose low council tax increases. Extra funds will be available to allow councils to freeze the tax for one year from April next year.

Mr Osborne said there would be no change to the duty on petrol, cigarettes and alcohol, and announced that Labour's plan to increase the duty on cider by 10 per cent above inflation would be scrapped.

The "landline tax" to fund the rollout of fast broadband will also be scrapped – instead, the government says it will support private investment, partly funded by the digital switchover underspend.

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