UK VAT 'to stay lower than EU average'

The UK standard rate of VAT will be notably lower than the European Union average even after if returns to 17.5% in the New Year, a new report shows.

The document from KPMG International claims that an urgent need for more revenue is pushing many governments into active moves to increase the take from indirect taxes. This will lead to the mean EU level rising to 20% during 2010 or 2011, the study predicts.

Measured against the current average of 19.8%, the UK will be levying the fifth-lowest VAT or GST (good and services) rate in Europe from 1 January. The 17.5% rate will, however, be significantly higher than the worldwide mean of 15.25%. The number of countries with indirect tax systems now exceeds 150 and is rising annually.

The recent 3% increase of the average rate of VAT/GST across the EU from 19.5% would have been greater but for the temporary cut of 2.5% in the UK and a 1% drop in Portugal, according to the paper from KMPG.

The company’s Sue Bonney said: ‘Indirect taxes are generally very stable. Up until this year, taxes on corporate profits have tended to decline each year while indirect taxes have stayed roughly the same. So, for the past five or six years, revenues from indirect taxes have quietly been contributing a larger and larger part of many government incomes.

‘Now we are seeing more active moves in this direction… If the UK VAT rate had not gone down [during 2009], we estimate that the fall in VAT receipts over the same period would only have been around 10%, showing that [the tax] is more resilient than corporate tax in the downturn,’ added Ms Bonney, who is KPMG Europe’s head of tax.

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