Independent financial expert Harvey Jones
answers a reader’s query about impact of the VAT increase
The VAT increase on 4 January 2011 will be one of the most painful austerity measures introduced by the coalition government.
It’s estimated that it will add £425 a year to the average family’s outgoings.
The rise from 17.5% to 20% will add around 2.5p to a litre of petrol, 7p to a pint of lager and 12p to a packet of cigarettes, according to website Kelkoo.
Meanwhile, though the percentage of the rise is the same, the impact on more expensive purchases seems more dramatic: the price of a new Ford Focus will rise from £17,870 to £18,250 – an increase of £380.
There isn’t much you can do to avoid the VAT rise completely.
By acting quickly and purchasing any big-ticket items before the increase, however, you can delay its full impact.
If, for example, you're considering buying a car, bathroom, washing machine or flatscreen TV in the next few months anyway, you could save hundreds by buying before 4 January.
If you book your summer holiday before the rise, as long as the VAT receipt is raised before 4 January you’ll still pay the lower rate of VAT – even if you’re not planning to travel until the summer.
It’s also worth bearing in mind that after VAT goes up some businesses may try to attract custom by paying the extra tax for you.
This is a good deal – but only as long as there are no extra hidden fees or charges.
The standard VAT rate of 20% won’t apply to everything you buy.
‘Essential items’ such as food, books, newspapers, magazines, children’s clothes and footwear remain VAT-exempt.
Some items incur VAT at a reduced rate of just 5%.
These include children’s items such as carry cots and car seats, as well as maternity pads, sanitary products, mobility aids for the elderly, nicotine patches and gum and your home gas and electricity bills.
Essential food items are VAT-exempt – but ‘luxury’ items aren’t.
Alcoholic drinks, for example, incur the standard rate of 20%, as do crisps, savoury snacks, takeaways, soft drinks, sweets and mineral water.
You can check out the comprehensive list on the HM Revenue & Customs website to find out which items that are taxed at a reduced rate or are untaxed.
There are some intriguing anomalies. Canned and frozen food are zero-rated, but ice cream, frozen yoghurt and ice lollies are standard rated.
Jaffa cakes, flapjack, sponge cakes, pastries, éclairs, meringues and marshmallow teacakes are zero-rated.
However, chocolate, muesli bars, lollipops, pastilles, candy floss, sherbert, bubblegum, Turkish delight and marshmallow are standard rated.
At the very least, the list might raise a smile.
Otherwise, you’ll just have to grin and bear the VAT hike.
- Harvey Jones is a freelance personal finance journalist who writes regularly for the Daily and Sunday Express, Motley Fool and lovemoney.com
- If you have a general financial query or dilemma unrelated to a specific financial services provider, email Harvey at email@example.com
- Harvey regrets that he cannot answer your questions individually. These are his personal views and not those of Virgin Money. Nothing in the article constitutes legal, financial or other professional advice.
- If you have a specific financial concern, you should always seek your own professional financial advice. All details given are correct as of 6 December 2010.
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