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20% VAT could cost 200,000 jobs says Ortus

20% VAT could cost 200,000 jobs says Ortus

If VAT is raised to 20%, 200,000 jobs could go
This may cost the current benefits system approximately 1.3bn
An increase to 25% (EU maximum) could put more than 600,000 out of work

There are significant effects on employment associated with changes in VAT, according to HR recruiter Ortus. These can be estimated in several ways: in more sophisticated methods, using economic modelling, a 1.0 per cent increase in the average VAT rate in the Netherlands led to a loss of 20,000 jobs approximately 0.3 per cent of the Dutch workforce (7,750,000 people).

The Ortus forecast suggests an increase from 17.5 per cent to 20.0 per cent in the UK could cost the country approximately 201,000 jobs as the increase in VAT is not only much higher, but we have a much larger workforce (more than 31.2 million people).

Assuming these people all claim job seekers allowance (between 100.95 per couple and 64.30 per individual every week), and remain unemployed for 18 months, this will cost the country approximately 1.3bn in benefits.

A larger increase in VAT, taking Britains VAT to 25.0 per cent - similar to the levels in Denmark, Hungary or Sweden - would cost more than 600,000 jobs and 3.9bn in benefits.

Stephen Menko, UK Director of Ortus said, Previous studies conducted in other European states suggest we can expect over 200,000 job losses from a move up to 20 per cent VAT. The Chancellor may well feel that a price worth paying but it certainly wont be without its costs. The only way to reduce job loss significantly would be to decrease other taxes, which is an option the Chancellor doesnt have.

The question is will George Osborne stop at 20.0 per cent? The EU allows members to increase VAT all the way up to 25.0 per cent. As VAT is the third largest source of government revenues, The Chancellor might view an increase to 25.0 per cent as a very attractive option. That would certainly have a much larger impact on the deficit than the 6bn worth of cuts the Tories have announced since the election.

HOW MUCH WILL VAT INCREASES RAISE IN TAX

According to Budget 2008, UK taxation receipts from VAT for the tax year 2008-2009 were 83.8bn.

Were VAT to rise to 20.0 per cent, UK taxation receipts would rise to approximately 96bn annually, an increase of 12bn.

Were VAT to be raised to 25 per cent, UK taxation receipts would then rise to 120bn annually. This would bring the Treasury coffers a further 24bn on top of the tax revenues generated by increase to 20.0 per cent and 36bn on the current position.

ABOUT VAT

VAT is charged at the standard rate of 17.5 per cent (which was temporarily cut to 15 per cent between 1 December 2008 and 31 December 2009) on supplies of goods and services. Different rates of VAT apply in different EU member states. The minimum standard rate of VAT throughout the EU is 15.0 per cent, although reduced rates of VAT are applied in various states on various sorts of supply (for example, domestic fuel and power in the UK).

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