Updated on May 24, 2022
VAT : the new 20% standard rate
George Osborne, the chancellor, announced the increase in the normal VAT rate from 17.5% to 20% on January 4, 2011, in his 2010 Budget Statement. This note examines the context of the announcement and the initial reactions.
As part of the Coalition Government, George Osborne delivered its maiden Budget to Parliament on 22 June 2010. For fiscal consolidation, Osborne announced several taxes, including a rise in VAT from 17.5 percent to 20 percent beginning on January 4, 2011, which was by far the most significant in terms of revenue generated. In 2011/12, it was predicted that the increase in the standard rate would raise £12.1 billion, and that amount would rise to £13.5 billion by 2014/15. At the unveiling of this proposal, the Chancellor stated:
This was inevitable because of the years of debt and overspending. By the conclusion of this Parliament, this one tax policy will yield nearly £13 billion in additional yearly income. We don’t have to come up with an additional $13 billion in spending cuts or income tax increases. As for zero-rated commodities like newspapers and printed books, I can guarantee to this House that we will keep them free of VAT for the duration of this Parliament. This includes food and children’s clothing.
As a budgetary stimulus to combat the crisis, the previous Labour government lowered the standard VAT rate from 1 December 2008 to 31 December 2009 to 15%. Days before then-Chancellor Alistair Darling issued his Pre-Budget speech in November 2008 that the rate will rise to 18.5% in 2010, the Government was widely reported as having decided against this course of action.
People speculated a lot about tax increases before the May 2010 general election, but none of the three major parties made any firm commitments to raise VAT, income tax or National Insurance contributions as part of their election manifestos (NICs). As announced in the Labour Government’s March 2010 Budget, NIC rates for employees, employers, and self-employed individuals would rise by one percent beginning in April 2011; none of the parties running in the election have advocated rolling back these increases.
A second temporary drop in VAT to encourage growth has been discussed, but the government hasn’t indicated that it plans to change the standard rate.
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