Think-tank calls for VAT change

Politicians should consider imposing VAT on food, children's clothes and household gas and electricity, a report from a think-tank suggests.

Eliminating the exemptions on VAT would make the levy a less complex tax and bring the UK in line with other nations, according to Reform.

The right-leaning think-tank also questioned the structure, simplicity and certainty of the tax system.

Between 50% and 60% of what the average household buys includes a VAT levy.

VAT returned to 17.5% in the new year after being reduced to 15% on 1 December 2008.

Food bill

The UK is one of four EU countries to apply a zero rate to food and one of three to apply a zero or reduced rate to children's clothes, the report highlighted.

John Whiting, tax policy director for the Chartered Institute of Taxation, said that politicians would find it tough in the court of public opinion to cut these exemptions.

There was a strong public reaction to moves to put VAT on fuel bills in the 1990s.

"It would be much easier to put the existing rate up," he said.

But the Reform report suggested that proposed changes to the National Insurance system would "hinder investment, employment and growth".

"Unfortunately all three major parties are committed to the most economically damaging tax rises - those on income and employment," the report said.

"The 50p income tax rate is seen by business leaders as a tipping point for the UK business environment."

Alternatives

As well as the VAT change, Reform said that changes to the personal allowance what also make the tax system simpler.

This would raise extra revenue of £8.3bn in 2011-12 and £8.4bn in 2012-13, compared with the government's plans which would raise £11.1bn in 2011-12 and £14.3bn in 2012-13, Reform said.

Under its suggestions, Reform calculated that households with incomes of less than £17,000 would, on average, see a tax reduction from lower National Insurance Contributions and protection from the broadening of VAT.

Households with incomes of over £17,000 would, on average, see a tax increase due to the broadening of VAT and, for higher rate taxpayers, replacement of personal allowances with a zero rate threshold. Individuals earning more than £105,000 would see a tax reduction.