VAT Budget Predictions

During the general election campaign, the Labour Party was clear that if it formed the next government, it would not increase the headline rate of VAT. We therefore assume that Rachel Reeves’ first Budget as Chancellor will leave the standard rate of VAT unchanged at 20%.

This article considers what other changes could be made to plug the claimed shortfall in public finances.

Private health

The Government has already taken steps to carry out its manifesto commitment to apply VAT to private and independent school fees. This is a hypothecated tax raising measure, as the proceeds will be applied in full to state education.

The proposed changes to primary VAT legislation introduce a carve out to existing VAT exemptions for the provision of education. The process used by HM Treasury lends itself to limitations to VAT exemptions in other areas. According to the Office for National Statistics (ONS):

Out-of-pocket expenditure, which includes private spending by consumers on hospital treatments, medical goods, and other health services and products, accounted for 13.8% of overall healthcare spending or £40 billion in 2023.” 

If the Government introduced hypothecated VAT on private healthcare, before taking account of any recoverable VAT, this could raise an additional £8bn in NHS funding.

Ultra-processed foods

The last government introduced the soft drinks industry levy (SDIL) in 2018. According to the latest statistics, the SDIL raised £338m in 23/24 and was intended to promote a 20% reduction in sugar usage for certain defined food categories.

Recent findings published by the Universities of Cambridge and Bristol, confirm that adolescents consume around two-thirds of their daily calories from ultra-processed foods (UPFs). Dr Yanaina Chavez-Ugalde from the Medical Research Council Epidemiology Unit at the University of Cambridge stated that:

UPFs make up the majority of adolescents’ diets, and their consumption is at a much higher level than is ideal, given their potential negative health impacts.”

Could the Government extend the concept of the SDIL and impose additional taxes on UPFs? The additional tax burden could help to promote a healthier lifestyle, reduce the pressure on the NHS, and increase the number of working age people in the workforce. It is hard to predict the additional tax revenues raised by this measure, as it would depend on the tax imposed and the definition of UPFs.

To take one simple example, the UK spent £3.2bn on cakes in 2023. Jaffa cakes, along with all other cakes, are currently free of VAT. Removing the cake tax break would raise up to £640m in VAT each year.

On the same theme, could the Chancellor be tempted to impose a rate of VAT above 20% on hot takeaway food? George Osborne’s experience of the pasty tax backlash might convince her this is not such a great idea.

Insurance premium tax

There are a range of other indirect taxes, including environmental taxes and insurance premium tax (IPT). To take one example, IPT raised over £8bn in 23/24. There are two rates of IPT, 12% and 20%, with the higher rate originally introduced to prevent value shifting between retail goods and services liable to VAT, and associated insurance cover, which was historically liable to a lower rate of IPT.

If the Government imposed 20% IPT on all insurance products currently liable to 12%, this could raise over £5bn in additional tax receipts. Every percentage point increase in the standard rate of 12% could therefore raise over £600m per year.

Prepare now

We have highlighted a small selection of the options available to the Chancellor as she prepares for her first Budget on 30 October. There are many other possibilities, including:

• A reduction in the VAT registration threshold, perhaps to align with average earnings. This could raise several billion pounds in additional tax but may be unworkable, given the considerable additional strain on HMRC.
• Removing the anomalies which allow certain sporting activities, such as golf, to be provided free of VAT, and
• The introduction of reduced rates of VAT on items which are currently zero-rated, such as food, children’s clothing, and books.