The reasons for a VAT increase and its effects

Back in June 2010, Chancellor George Osborne increased VAT from 17.5% to 20% and cut welfare spending as he moved ‘decisively’ to tackle Britain's record debts. Unveiling his first Budget to MPs, Mr. Osborne said "tough but fair" action on debt was “unavoidable”. According to the British Government, UK households, on average, will be about £400 a year worse off, with the poorest 10% losing £200 and the richest £1,800, although the poorest will be hit harder than most as a percentage of their income.

So what is VAT (Value added tax)? It is tax that is charged on most goods and services that VAT-registered businesses provide in the UK. It's also charged on goods and some services that are imported from countries outside the European Union (EU), and brought into the UK from other EU countries. Below is a list of what is VAT exempt:

Group 1 - Food

Group 2 - Sewerage services and water

Group 3 - Books etc

Group 4 - Talking books for the blind and handicapped and wireless sets for the blind

Group 5 - Construction of buildings, etc

Group 6 - Protected buildings

Group 7 - International services

Group 8 - Transport

Group 9 - Caravans and houseboats

Group 10 - Gold

Group 11 - Bank notes

Group 12 - Drugs, medicines, aids for the handicapped, etc

Group 13 - Imports, exports, etc

Group 15 - Charities, etc

Group 16 - Clothing and footwear

Although you are obliged to pay the VAT on any other, goods, you are entitled to claim the money back if your firm is VAT registered. Input tax (the VAT you pay on raw goods) can be claimed back as part of the legitimate expenses that your business runs up – if you regularly pay more VAT than you collect you can claim this money back on a monthly basis by filling in a return. To be VAT registered, the business’ turnover must exceed £67,000 a year (with other T+C’s) 

There are many reasons for an increase in VAT and there are many ways in which the rise in VAT would have affected you. Business or personal. VAT can often have massive repercussions on their respective industries. Weakening consumer confidence is never a good thing for industries especially effected by the increases (i.e. entertainment sector). It is without doubt the British VAT change has an impact on global markets.