VAT cut 'psychologically damaging'

Date: 15th December 2009

Both consumers and retailers could suffer psychologically due to the upcoming VAT rate reversion, according to a currency expert.

Mark O'Sullivan, director of dealing for Currencies Direct, suggested that the government's decision to raise the sales tax back to 17.5 per cent from January 1st 2010 could ultimately prove counterproductive.

However, he added that he did not believe the tax increase would have a "major" effect.

The move was confirmed by chancellor of the exchequer Alistair Darling's Pre-Budget Report last week.

Increasing VAT should in theory result in higher government tax revenues and will help to reduce public deficits.

Tackling debts is a key priority of Mr Darling, who also announced in the Pre-Budget Report that the public balance sheet would move into the red by £178 billion this year.

Mr O'Sullivan said: "I think [the change is] going to be more psychological than anything. The chancellor was looking to raise [VAT] even higher, I think, but any tax that's perceived to be an increase by the retail sector could be a drain upon the economy.

"I don't think VAT is going to be that major, because when you ask any person on the street it might not register, but it's the psychological thing – it's going up, rather than going down."

Mr O'Sullivan's opposition to higher VAT echoes that of Tesco, the UK's largest supermarket.

Last week, Laurie McIlwee, finance director for the firm, said that any move above 17.5 per cent would reduce consumer confidence.

Posted by Jacob Williams