Put VAT on food, books and baby clothes, urges influential think tank

VAT should be extended to food, baby clothes and books as part of an overhaul of the UK's tax and benefits system, a leading think tank has said.

A report by the Institute for Fiscal Studies (IFS), which called for VAT to be extended to most goods, said consumers could be reimbursed for the extra VAT they would pay by increased benefit payments and reduced income tax.

It claimed the simplified system would save the government about 3 billion a year.

Currently, most healthy food, water, books, passenger transport, prescription drugs and children's clothes are exempt from VAT, while domestic energy bills attract a discounted rate of 5 per cent. The VAT exemptions traditionally have been seen as a way of protecting the most vulnerable in society, and the IFS admitted some of its suggestions would be "politically difficult" to bring in.

But it said the reduced rate of VAT on domestic fuel encouraged people to burn environmentally harmful fossil fuels.

It also called for income tax and national insurance to be merged and for the benefits system to be simplified to make it easier for people to make claims.