Friday, January 7, 2011

How does VAT increase affect you? You'll be surprised

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"Families to pay £600 more after rise in VAT" - The Times

The headline grabbed my attention on 3rd Jan 2011. £600 is quite a bit, it can pay for almost half a year's worth of council taxes, more than a year's of broadband or months of groceries. Some claimed that the poor will be hit the hardest while others claimed that the middle class is going to foot the bill. But before you going around beating your chest, let's take a look at how you will be affected after the VAT increase from 17.5% to a whopping 20%.

Barring non essential big ticket items (yes, that Sony desktop replacement laptop is hardly essential), we spend mainly on three main categories: accommodation (utilities, rental etc.), transport and food.

Accommodation

According to HM Revenue & Customs (HMRC), even with the new VAT system in place, all building and construction other than conversion, alteration and installation of security items would be either having a 0% VAT or exempted from VAT. Those with VAT will at most incur 5%.

If you are renting, the good news is that your rent would be fixed at least till the lease is up. You'll be at the mercy of the landlord after that.

Under the new system, electricity and gas supplies to residential units would be levied a 5% VAT. That for water supplied would be 0%.

Transport

Unless you plan on staying put at home every single day, you'll probably need to travel. Interestingly, all passenger transport (that carries more than ten at a time) would be incur 0% VAT. Of course, we all know that transport fares have increased. The increase, unfortunately falls outside of HMRC's jurisdiction and was ordered by Transport for London and the individual train companies.

So the next time when you are stuck on the train, be thankful that at least you aren't charged VAT.

Food

This is one huge point of contention between the political parties. The conventional wisdom (as employed by Labour) is that the poor are going to be hit the hardest as they would have to pay for the essentials, which I assume food is a huge component. The Tories, on the other hand, claimed that food items are exempted so the wealthy who would end up footing the VAT bill with their big ticket items would be hit the hardest. Well, they are both right on this count.

Let's see. HMRC states that "Food and drink for human consumption is, in general, zero-rated (0% VAT) but many items are standard-rated (20% VAT), including alcoholic drinks, confectionery, crisps and savoury snacks, food for catering or hot takeaways, ice cream, soft drinks and mineral water."

It seems that while most food items carry 0% VAT, some items are charge the full 20%. Stick to the standard groceries (vegetables and meat), avoid snacks and tidbits, and you wouldn't feel the pinch. Sticking to your new year resolution of going sober would help too.

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So there you go, the effects of the new VAT system on the three main areas that we spend on: accommodation, transport and food. From the looks of it, unless we plan on splashing out on expensive holidays or the newest 50-inch 3D TVs, the impact wouldn't be as big as you think. Well, at least not from VAT alone. How are you affected by the VAT increase to 20%?

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2 comments:

William K Wallace said...

I'm personally not going to be hugely effected by the VAT rise, I don't plan on making any major purchases in the near future.

I'm getting into the spirit of living in a so called recession. I will make do with the clothes I have. I plan on eating healthier, which involves eating less snacks. I don't suppose my new lifestyle choices will help to boost the economy but the Government has forced my hand as they say...

C K said...

@William,
I guess that's the irony isn't it? The VAT increase is meant to raise money and reduce the deficit. But more people cut back on their spending, the sum raised would be very much lower than the official expected figure.

On the flipside, all of us would learn to live with less. Not necessarily a bad thing, is it?