Increase in standard VAT rate to 20%

Many taxpayers would see an increase in VAT as a prudent measure to adopt in trying to reduce the current deficit.
 
This sentiment is reflected in Switzerland where Swiss citizens recently voted in favour of a small VAT rate increase, from 7.6% to 8%, in order to reduce the country's large disability insurance deficit. Although the increase is small, it is likely to be in place for seven years.

Many other countries, such as Spain, Latvia, Lithuania, Hungary and Estonia, have announced increases to their respective standard rates of VAT.

At 17.5% the UK has the third lowest standard rate of VAT in the EU as many other Member States have adopted a VAT rate between 20% and 25%. Only Cyprus and Luxembourg have a lower rate than us – 15%. The average rate is just over 20%. An increase to 20% is therefore a real possibility i.e. an increase of 2.5% to balance the decrease of 2.5% in place throughout 2009. Could raise £12 billion (on the basis that the 2.5% cut was estimated to cost £12 billion), though difficult to predict due to uncertain consumer spending etc. – this is the equivalent of 3p on income tax. A greater than 2.5% rise appears to be unlikely, although it should be remembered that Member States are free to set whatever standard rate of VAT they like (provided it is not below 15%).

However, an increase in the VAT rate is unlikely before the general election. Many believe that the key to successful implementation will be to introduce the increase in the first Budget of the new government, which is likely to be in June or early July. This strategy has worked for previous Governments, and as part of a plan to reassure taxpayers that the deficit is under control and will be reduced, it could be successfully 'sold' to consumers.