Market leading insight for tax experts
View online issue

2011 brings in fresh European VAT hikes

printer Mail
Alongside the UK’s VAT increase to 20% in January, there were six other major consumption tax rises in Europe at the start of 2011. This comes on the back of seven similar increases on the Continent in 2010, raising the average GNP-weighted VAT rate in the European Union from 18% to 21% since 2007.
Spiralling government deficits and competition for global inward investment lay at the route of these rises, and we can anticipate more. The risks are high for governments wrestling with failing consumer confidence and rising inflation.
Europe competes for global investment
For some years, there has been a global-wide trend to shift the tax burden away form job-creating business onto consumers. Whilst cost-conscious commerce is increasingly relocating for tax advantages, or subject to fickle economic cycles, consumers are less mobile due to personal and cultural ties and retain more predictable spend – and therefore taxation – patterns.
A prime example of this taxation policy in action was Germany increasing its VAT rate from 16% to 19% in 2007, and at the same time cutting its employer tax charges. Many other European countries are anxious to emulate this strategy and prop-up employment rates and tax revenues. In almost every case the new European VAT rises in 2011 have been accompanied by plans for reductions in business taxes. For example, the UK’s VAT rise decision was announced together with a scheduled cut to the corporation tax rate from 28% to 24% by 2014/15. This will make it the lowest in the G7 and fourth lowest in the G20.
Financial crisis sparks latest rises
This latest round of rises – led by the UK, Switzerland, Poland, Portugal, Latvia and Slovakia – has been forced through due to panicked bond markets looking for statements of intent from indebted countries. VAT is a quick and low-cost revenue generating tool for states determined to reassure the markets of their deficit cutting credentials. It follows rises in July 2010 by Spain, Greece, Finland, Romania and elsewhere.
Jersey is to raise its GST rate from 3% to 5% in June 2011 to help with a budget shortfall. Ireland has also announced a planned two-step VAT increase from the current 21% to 23% by 2014 as part of the European Central Bank and IMF bail-out.
Consumption tax hikes are not just a European theme. Globally, rates are rising as countries act to stifle fiscal problems. Mexico, Malaysia and Canada all implemented recent VAT or GST rises.
Consumer confidence risks
The gamble of rising VAT to keep businesses and money markets mollified is the subsequent impact on the already weakened consumer. For many states, especially the UK, the consumer had been sustaining economic activity during the recent financial turmoil. The VAT increases, coming on top of public sector job cuts, are already denting this. European-wide consumer confidence levels were falling fast before the New Year, and the latest UK numbers show a collapse in confidence to levels last seen during the height of the credit crunch in March 2009.
The outlook for 2011? No doubt more rises as countries seek to rebalance their economies weighed down by increasingly unsupportable sovereign debt mountains. Crisis-ridden Greece and Portugal have both been forced into two rises in the past year. So we can probably expect the same from others over the next year.
Richard Asquith, Head of VAT, TMF Group
Issue: 1063
Categories: In brief , Indirect taxes , VAT