Fears Labor will launch VAT raid to recover billions
Tax hoarding: shadow chancellor Rachel Reeves
A Labor government that raises taxes could find the savings it needs for a larger state by applying VAT to goods and services currently exempt or at reduced rates. Such concessions are estimated to cost the Treasury up to £100 billion a year.
The Institute for Fiscal Studies (IFS) has highlighted in a recent report the potential for the Labor Party to make a multi-million pound VAT grab.
Party leader Sir Keir Starmer has already shown he is not afraid to use VAT as a political and economic tool by promising to penalize independent schools by ending their exemption from VAT and business rates, which he says , would raise £1.7bn to reinvest. in state education.
Research carried out by IFS for the British innovation agency Nesta argues that VAT “has enormous appeal as a tax collection tool” due to “distortions and a high compliance burden.”
Labour’s shadow chancellor, Rachel Reeves, is showing an iron will to curb the tax and spending ambitions of the left of the party and the unions. She has already ruled out a wealth tax and backed down from Ed Miliband’s proposal to spend £28bn a year on net zero emissions from the start of the next Parliament. That leaves VAT increases as one of the few options left on the table.
Reeves is working with tax experts to identify “loopholes” in the tax reliefs business owners enjoy. It would be surprising if at some point the focus was not on VAT, an obvious source of gold.
The IFS maintains that VAT exemptions – ranging from food to financial services to newspapers – distort spending and production decisions “in an unjustified and often unfair way”.
Expensive court battles have been fought over whether Jaffa Cakes and flapjacks should be exempt, leading to “absurd” results.
Conservative chancellor George Osborne was forced to make an embarrassing U-turn in 2012 when he attempted to impose VAT on foods designed to be chilled, such as pasties or sausage rolls. He was considered out of touch with ordinary citizens. It would be surprising if Labor had not realized that while most services, such as hospitality and plumbing, receive the full 20 per cent rate, financial services are excluded.
The largest exemption applies to zero-rated products, such as food, children’s clothing and home heating. Aimed at helping the poorest families, these measures are poorly targeted. In monetary terms, rich families make huge profits because they spend more.
The IFS says billions could be saved if concessions were limited to Universal Credit and benefit recipients. And the 5 per cent VAT rate on domestic fuel encourages the use of gas boilers, preventing progress towards net zero targets.
But eliminating VAT exemptions would cause problems. In 1993, Conservative chancellor Norman Lamont almost committed political suicide by trying to increase VAT on household energy bills to 17.5 per cent. Labor is exploring a new carbon tax.
The VAT is more than half a century old and is considered an economically efficient tax. It replaced taxes on the purchase of specific goods, but many say the reform is long overdue. And the Labor Party has shown with independent schools that it is willing to tinker with the status quo.
Starmer and Reeves have launched a charm offensive in the city, lunching and dining executives. But exempting financial services – one of the largest and most profitable contributors to the UK economy – could prove a more appetizing start than energy or pasties.