Raise VAT not national insurance, business group urges

15 February 2010

The government should drop plans to raise national insurance contributions and instead should increase the rate of VAT to 18.5 per cent, the British Chambers of Commerce (BCC) has argued.

The call from the BCC to switch the onus on tax rises from businesses to consumers came on the back of the group's latest monthly survey of its members.

Almost half of respondents (41 per cent) said that the top priority of the government must be to cut the budget deficit.

Some 22 per cent cited a reduction in red tape as the most important aim, while 13 per cent put a more competitive tax system at the head of their wish list.

As for measures aimed at reducing the budget deficit, the planned rise in NICs was seen as the most harmful tax increase that the government could impose. Only 6 per cent thought that a hike in NICs would be the least damaging option, compared with 36 per cent who opted for a rise in VAT.

Using the Treasury's Tax Ready Reckoner, the BCC calculated that a 1 per cent increase in VAT, to 18.5 per cent, would yield the government an extra £4.5 billion in revenue.

On the other hand, freezing the proposed 1 per cent rise in NICs would save businesses £5.1 billion.

David Frost, the BCC's director general, commented: "After an election, we have to get a serious grip on the country's public finances and escalating debt. Cutting the deficit means making tough decisions on spending, like freezing the public sector wage bill and reforming public sector pensions.

"Companies have and will continue to play their part in creating wealth and jobs, generating economic growth and driving recovery, but the right environment needs to be in place."

Mr Frost described the NIC rise as damaging and counter-productive, its consequences in the long term being fewer jobs and less tax revenue.

He continued: "While businesses fully understand the need to bring down the UK's deficit, they are clearly saying that using VAT would be a less damaging way to achieve this.

"So let's scrap the NICs 'tax on jobs' and offset it with a 1 per cent VAT increase. It's a tough call, but we have to be realistic about repairing the public finances, and promoting recovery."