UK: VAT tax increase

Proposal

In 2010 the UK Con-Dem coalition announced its plan to increase VAT from 17.5% to 20%; a move which was expected to increase annual tax revenue by £12b. This was an especially controversial measure as VAT is widely recognised as a regressive form of taxation, which the Lib Dems had directly criticised the Conservatives for considering ahead of the election, and which the Conservatives had explicitly ruled out. The adoption of the proposal in 2010 represented a clear U-turn upon entering government, and provided opportunities for opponents to make allegations of deception and ‘broken promises’ – see, for instance, Bournemouth Uncut’s The Great VAT Swindle analysis.

We consider the measure to be moderate, in that it represented a significant, but relatively small, increase in the cost of consumption. Further, we consider the target to be on ‘outsiders’, in that it would disproportionately affect those on low incomes.

Severity: moderate

target: outsiders

Refusal

Public opposition

The proposed tax reform witnessed a wave of public criticism regarding the tax. This focused especially on three potential problems – the impact that it would have on inequality (due to VAT’s regressive consequences, the impact on aggregate demand (which, it was feared, threatened growth), and the potentially inflationary effect due to its impact on prices. Criticism was not, therefore, limited to social justice groups, but was also voiced by business associations – for instance, the British Retail Consortium described the tax rise as “disappointing” and its director general Stephen Robertson said: “We didn’t want a VAT increase. It’ll hit jobs, consumer spending, the pace of recovery and add to inflation.” Nevertheless, despite opposition from retail businesses, business in general was pleased that VAT (amongst other taxation options) was chosen as the means by which to increase revenue; with the British Chamber of Commerce calling it the “least worst option“.

Opposition to the planned VAT tax rise took a number of forms. Whilst public protest tended not to focus explicitly on the VAT tax rise, a wave of tax-related protests did break out in the second half of 2010. UK Uncut emerged as the main coordinator of these tax protests, which explicitly targeted Vodafone on the grounds that the company had benefited from an alleged £6b tax write-off deal. Protests took place initially on twitter, with 1000 people signing UK Uncut’s online petition in October 2010, and was subsequently followed by staged occupations and protests outside the premises of Vodafone in stores across the country, including Brighton, Glasgow, Birmingham, Liverpool, Edinburgh, Leicester, York, Bristol, Portsmouth, Southampton, and Cambridge. Many of these were highly disruptive, forcing the shops to close whilst protesters were forcibly removed by police.

Whilst the core focus of these protests was tax avoidance, the forthcoming rise in VAT had helped to politicise the question of taxation, resulting in the explicit connection on a number of occasions between the protests and the 20% tax rise. For instance, Murray Williams, a UK Uncut spokesman, said: “In a time when we’re being told that we’re all in this together and when we’ve all got to accept these harsh cuts to housing benefit and the NHS and take a hike in VAT … trying to claim that these companies then don’t have to pay their fair share of that too – I just don’t think that’s on’ (emphasis added).

The protests were still continuing 12 months later, having gained substantial media and political attention.

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At times the wave of anti-tax avoidance and anti-cuts protests that occurred throughout 2010-11 focused more explicitly on the VAT tax rise. For instance, in January 2011 (the month that the VAT tax rise came into effect), protests focused more explicitly on the priorities reflected in the rise. In the words of one placard, ‘VAT up; Corporation Tax down; Cameron’s priorities clear’.

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Similarly, one of the biggest organised demonstrations against the Coalition Government’s programme of deficit reduction – the so-called ‘March for the Alternative’, on 26 March 2011 – focused explicitly on the impact of the VAT increase. Thus, the official website for the event noted in its ‘Why We’re Marching’ statement that, ‘raising four pounds through cuts for every pound raised through tax – and doing most of this through a rise in VAT that hits the poor and those on middle income the most – is deeply unfair’ (emphasis added).

In early 2011 a campaign group focused directly on the VAT rise was launched. Take VAT sought to model its protest actions on those of UK Uncut, and gained national media attention as a result.  The group also went on to conduct a number of disruptive protests at Heathrow and Leeds/Bradford airports (in opposition to the VAT exemption granted to the aviation industry) and a ‘subvertising’ campaign targeted on a major billboard (imperceptible/cultural dissent, albeit here made visible with only one limited incident).

Public opposition was therefore of both a disruptive and non-disruptive nature. In both cases, however, the focus was only indirectly focused on the VAT rise (with tax evasion attracting the bulk of the attention) – and we therefore consider it to have been limited in extent.

imperceptible dissent: limited
public opposition (non-disruptive): limited
public opposition (disruptive):
limited

Obstacles

In terms of obstacles to austerity, the public opposition that was voiced in response to the VAT tax rise created a risk that the government’s popularity would be affected. Indeed, this risk was exacerbated as both the Lib Dems and the Conservatives had earlier ruled the VAT tax rise out – and therefore created the impression of untrustworthyness amongst the electorate.

There also emerged a fear regarding the disruptive impact of the anti-tax protesters, which occurred throughout the second half of 2010 and all of 2011; as these protests frequently disrupted retail stores, and prompted fears in December 2010 that hundreds of shops would be closed during the Christmas shopping period. Sir Philip Green – retail magnate and adviser to the coalition government – was particularly targeted.

There were, however, no clear signs of major obstacles limiting the implementation of the VAT tax rise; nor of any indirect obstacles created as a result of the ongoing instances of refusal.

Response

discipline – deployment of undercover policing in December 2010 and the prosecution of the Fortnum and Mason occupiers in 2011.

consent-seeking: the Government sought routinely to highlight the ‘necessity’ and ‘fairness’ of the tax rise – on the grounds that it would create a rebalancing of public finances and spread the burden across society – as the rich would contribute more due to its capacity for higher spending and is therefore the “least worst” option in a context where tax rises are necessary. At one point Cameron seemed to contradict his earlier admission that VAT rises were regressive, claiming that they were in fact progressive (as high spenders contributed more); although this was the subject of considerable criticism, especially from the Labour Party Opposition.

concessions – Concessions were made following criticisms of the Government’s inegalitarian policies, especially in the 2013 budget, in the form of tax policies – for instance, the freezing of petrol duty, the freezing (and lowering) of duty on beer, and the reduction of National Insurance contributions. These appear to be a direct attempt to offset public criticism of the government’s regressive policies. Thus, the FT reported that the announcement of the fuel duty freeze was a response to ‘pressure from backbenchers to help household budgets’ . Osborne himself also acknowledged the importance of seeking to help households in his 2013 budget speech, stating that,

Osborne (2013 budget statement): “Let me turn to duties. We inherited a fuel duty escalator from the previous Government that would have seen above-inflation increases in every year of this Parliament. We abolished the escalator and we have now frozen fuel duty for two years. This has not been easy. The Government have forgone £6 billion in revenues to date, but oil prices have risen again, family budgets are squeezed, and I hear those who want me to do more to help them get by. My hon. Friend the Member for Harlow (Robert Halfon) has again spoken up for his hard-working constituents. He has been joined by many other hon. Friends, like the hon. Member for Argyll and Bute (Mr Reid). We have all listened to the people we represent. Today I am cancelling this September’s fuel duty increase altogether. Petrol will now be 13p per litre cheaper than if we had not acted over these last two years to freeze fuel duty. For a Vauxhall Astra or a Ford Focus, that is £7 less every time you fill up.

“There is another duty escalator that we also inherited from the previous Government—the annual 2% above inflation increase in alcohol. We are looking at plans to stop the biggest discounts of cheap alcohol at retailers, but responsible drinkers in our pubs should not pay the price for the problems caused by others. The sad fact is that we have lost 10,000 pubs in the UK over the past decade. Many hon. Members, such as my hon. Friend the Member for Bristol North West (Charlotte Leslie), have raised their concerns with me, and my hon. Friend the Member for Burton (Andrew Griffiths) in particular has been a committed champion of the famous brewing industry that employs many of his constituents.

“I intend to maintain the planned rise for all alcohol duties, with the exception of beer. We will now scrap the beer duty escalator altogether, and instead of the 3p rise in beer duty tax planned for this year by the previous Government I am cancelling it altogether.

“That is the freeze people have been campaigning for, but I am going to go one step further and cut beer duty by 1p. We are taking a penny off the pint. The cut will take effect this Sunday night and I expect it to be passed on in full to customers. All other duties will remain as previously announced.

“Of course, freezing petrol duty and cutting beer duty will not transform the finances of any family, but it helps a little to have some bills that are not going up.”

Similarly, the politicisation of taxation and tax evasion/avoidance that had resulted from the UK Uncut’s campaign was also responded to in part by the Government in its 2013 budget statement. Thus, Osborne announced, “Today I am unveiling one of the largest ever packages of tax avoidance and evasion measures presented at a Budget. The details are set out in the Red Book. They include agreements with the Isle of Man, Guernsey and Jersey to bring in over £1 billion in unpaid taxes and new rules to stop the abuse of partnership rules, corporate tax losses and offshore employment intermediaries. That is another £2 billion. This year we are giving Britain its first ever general anti-abuse rule, and we will name and shame the promoters of tax avoidance schemes. My message to those who make a living advising other people how to aggressively avoid their taxes is this: this Government will not let you get away with it. This year we are leading international action on tax avoidance through our presidency of the G8 and with the OECD and the G20. We want the global rules governing the taxation of multinational firms to be updated from the 1920s, when they were first written, and made relevant to the global internet economy of the 21st century. This is the right and fair thing to do.” Further, in 2015,  the chancellor announced a significant additional investment of £800m over the next five years for HM Revenue & Customs, to boost its work on non‑compliance and tax evasion.

Whilst each of these concessions amounted to a substantial (albeit moderate) attempt by the government to respond to the instances of refusal and resistance highlighted above, nevertheless they did not substantially affect the direct implementation of the VAT tax rise (although clearly some of the tax reductions have had a countervailing effect). We therefore consider these concessions to be mild in scope.

Concessions: mild

Outcomes

Went ahead?

Yes.

Consequences?

There were few signs of direct consequences suffered by the government as a result of its VAT tax rise.

sum: no obstacles, no consequences, adopted almost in full (0+0+0.5=0.5)