The public purse is worse than empty and the next government will need to act. But would it really extend VAT to all food and drink? Ronan Hegarty reports
Just as the food and drink sector begins to recover from putting VAT back up to 17.5% during the busiest period of the year, a new and potentially more damaging threat has arrived: the suggestion that VAT be extended to all food and drink items.
The idea was first mooted last week by right-wing think tank Reform and was swiftly followed by soundbites from Labour and Conservative HQs, each accusing the other of hatching secret plans to introduce the policy a charge both parties swiftly denied.
Amid this political tittle tattle came confirmation this week that the Budget would be announced on 24 March. The Budget itself is unlikely to contain any change in VAT, popular opinion being that it would be electoral suicide this close to the general election.
Nevertheless, the industry has been quick to state its opposition to such a scheme. "Despite the fragility of the economic recovery, regulatory pressures and tax burdens on our members continue to grow, while important business incentives are being cut," says Food and Drink Federation director general Melanie Leech.
The change in the Climate Change Levy discount announced in the Pre-Budget Report in December was one such unwelcome surprise, she says. "If the UK's biggest manufacturing sector is to keep playing a positive role in supporting economic recovery, we strongly urge the Chancellor to listen to our concerns and ensure his Budget places no additional burdens on the food and drink sector."
The FDF is not aware of any concrete moves on VAT, but the fact that it is back on the political agenda reflects the urgent need to reduce the budget deficit. Whichever government takes power post-election will have to evaluate every option for restoring the public purse.
Reform claims removing the zero rate for food, children's clothing and household gas and electricity would simplify VAT (the rules and anomalies span 21 pages and are a constant source of legal argument: for example, smoothies are VAT-rated, but fruit preserved in alcohol is exempt). This would also bring it in line with most other countries, Reform argues, while helping the Exchequer raise £8.3bn in 2011/12 and £8.4bn the next year.
"The parties would not be doing their job properly if they hadn't looked at VAT," admits British Retail Consortium head of media and campaigns Richard Dodd.
However, extending VAT would be a mistake, he says. "I'm sure tax increases will be a part of the next government's strategy to tackle the budget deficit, but we would urge politicians to address this through cuts in public spending".
Extending VAT to cover all food or increasing the rate to 18.5% which appears a more likely post-election option would penalise the least well-off, claims Dodd. Those for whom food shopping makes up the highest percentage of overall expenditure would suffer disproportionately compared with those on higher incomes.
The idea of extending VAT was first proposed in the 1990s, when Ken Clarke was Chancellor, but was quickly shelved due to public opposition. Although the need for drastic measures is now even greater, the public is still unlikely to accept such a move.
Food is becoming a major election issue and is being kicked around as a political football. Children's Secretary Ed Balls this week asked "is George Osborne planning a rise in VAT or an extension in VAT to food to make up gaps in Tory finances?" A spokesman for the shadow chancellor branded the claim "nonsense" and hit back: "Labour are the only people who have drawn up plans for a VAT increase and this is a desperate attempt by Ed Balls to distract attention from that."
For now, the subject remains a political stick with which to whack the opposition. But it would take a brave government to risk a backlash on VAT prior to an election, no matter how empty the coffers.
Current VAT ratings
Zero rating (0%): Food and drink except when supplied in the course of catering, or for non-essential items
Reduced rating (5%): Women's sanitary products
Standard rating (17.5%): 'Non-essentials' such as confectionery, crisps, savoury snacks, ice cream, chocolate biscuits, cereal bars, alcoholic drinks, soft drinks and mineral water; as well as additives such as monosodium glutamate and bicarbonate of soda
Just as the food and drink sector begins to recover from putting VAT back up to 17.5% during the busiest period of the year, a new and potentially more damaging threat has arrived: the suggestion that VAT be extended to all food and drink items.
The idea was first mooted last week by right-wing think tank Reform and was swiftly followed by soundbites from Labour and Conservative HQs, each accusing the other of hatching secret plans to introduce the policy a charge both parties swiftly denied.
Amid this political tittle tattle came confirmation this week that the Budget would be announced on 24 March. The Budget itself is unlikely to contain any change in VAT, popular opinion being that it would be electoral suicide this close to the general election.
Nevertheless, the industry has been quick to state its opposition to such a scheme. "Despite the fragility of the economic recovery, regulatory pressures and tax burdens on our members continue to grow, while important business incentives are being cut," says Food and Drink Federation director general Melanie Leech.
The change in the Climate Change Levy discount announced in the Pre-Budget Report in December was one such unwelcome surprise, she says. "If the UK's biggest manufacturing sector is to keep playing a positive role in supporting economic recovery, we strongly urge the Chancellor to listen to our concerns and ensure his Budget places no additional burdens on the food and drink sector."
The FDF is not aware of any concrete moves on VAT, but the fact that it is back on the political agenda reflects the urgent need to reduce the budget deficit. Whichever government takes power post-election will have to evaluate every option for restoring the public purse.
Reform claims removing the zero rate for food, children's clothing and household gas and electricity would simplify VAT (the rules and anomalies span 21 pages and are a constant source of legal argument: for example, smoothies are VAT-rated, but fruit preserved in alcohol is exempt). This would also bring it in line with most other countries, Reform argues, while helping the Exchequer raise £8.3bn in 2011/12 and £8.4bn the next year.
"The parties would not be doing their job properly if they hadn't looked at VAT," admits British Retail Consortium head of media and campaigns Richard Dodd.
However, extending VAT would be a mistake, he says. "I'm sure tax increases will be a part of the next government's strategy to tackle the budget deficit, but we would urge politicians to address this through cuts in public spending".
Extending VAT to cover all food or increasing the rate to 18.5% which appears a more likely post-election option would penalise the least well-off, claims Dodd. Those for whom food shopping makes up the highest percentage of overall expenditure would suffer disproportionately compared with those on higher incomes.
The idea of extending VAT was first proposed in the 1990s, when Ken Clarke was Chancellor, but was quickly shelved due to public opposition. Although the need for drastic measures is now even greater, the public is still unlikely to accept such a move.
Food is becoming a major election issue and is being kicked around as a political football. Children's Secretary Ed Balls this week asked "is George Osborne planning a rise in VAT or an extension in VAT to food to make up gaps in Tory finances?" A spokesman for the shadow chancellor branded the claim "nonsense" and hit back: "Labour are the only people who have drawn up plans for a VAT increase and this is a desperate attempt by Ed Balls to distract attention from that."
For now, the subject remains a political stick with which to whack the opposition. But it would take a brave government to risk a backlash on VAT prior to an election, no matter how empty the coffers.
Current VAT ratings
Zero rating (0%): Food and drink except when supplied in the course of catering, or for non-essential items
Reduced rating (5%): Women's sanitary products
Standard rating (17.5%): 'Non-essentials' such as confectionery, crisps, savoury snacks, ice cream, chocolate biscuits, cereal bars, alcoholic drinks, soft drinks and mineral water; as well as additives such as monosodium glutamate and bicarbonate of soda
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