20 per cent VAT rise will "hit poorest hardest"

Families hit by extra £500 on tax

23rd June 2010

Families face shelling out an extra £500 a year following George Osborne's decision to increase VAT from 17.5% to 20%.

The Chancellor hopes the increase will raise £13bn a year by 2014 and go some way to reducing the country's massive deficit.

But the decision was heavily criticised in the Commons during Osborne's Emergency Budget speech, with acting Labour leader Harriet Harman slamming the Tories for going back on a pre-election promise not to raise VAT.

"As the Prime Minister himself said on VAT, he said: "It's very regressive, it hits the poorest hardest". It does, I absolutely promise you," said Miss Harman to MPs.

The VAT rise will come in on 4 January 2011, meaning the important Christmas spending period will be unaffected.

But once it comes into effect, the Treasury estimates that each of the 26m households in Britain will have to pay an extra £517 in tax every year as a result of the hike.

The government maintains the rise will affect higher earners more than those on low income but official figures seem to back up Harman's claims that the poorer will be hit hardest.

The Office for National Statistics say that while the richest 10% in the UK spend £1 in every £25 of their income on VAT, the poorest 10% spend £1 in £7.

Meanwhile, retailers fear the rise will lead to a decrease in sales as consumers refuse to accept increased prices.

Stephen Robertson, director general of the British Retail Consortium, said: "We didn't want a VAT increase. It will hit jobs, consumer spending, the pace of recovery and add to inflation but we accept the Government has no easy options.

"It's some consolation that the range of VAT-able products isn't being extended. The start date, in the middle of the busy and crucial post-Christmas sales period, will be difficult but retailers would rather have more notice than less."

Claims Financial