Single VAT rate proposed

Date: 1st August 2008

A new report has suggested the government should consider applying a standard rate of VAT to all items.

Currently, residential housing and children's clothes do not attract VAT and items such as domestic energy, contraceptives and children's car seats are subject to a reduced rate of five per cent.

However, a report from the Institute for Fiscal Studies (IFS) argued that applying a standard rate of VAT to all items would help poorer families and provide the revenue to let the government cut other taxes by £11 billion.

According to the research, the UK's VAT rate of 17.5 per cent is around the average for industrial countries. However, it noted: "The UK applies zero rates more extensively than most other countries."

The report explained: "Applying zero or reduced rates of VAT to items on which poorer households spend a relatively large proportion of their budgets is a blunt instrument with which to help the less well off, as richer households typically gain more in cash terms from these tax breaks than poorer ones."

Instead, the IFS argued that the extra money raised through a universal VAT regime could be used to increase means-tested benefit and tax credit rates by 15 per cent and to cut other taxes.

The report formed part of the IFS' submission to the ongoing Mirrlees Review of tax system reform.