Businesses will pay more in the next few years to comply with the UK’s “special” VAT rate, which is designed to discourage firms from using it to lower their tax bills.
The Office for National Statistics (ONS) said businesses would pay about £12bn a year in the first year of a tax relief in the shape of a 1.5% increase in the VAT rate.
The government said the relief would also apply to companies that use it to avoid VAT.
But that figure includes the £11.7bn from the UK, Norway, Ireland, Luxembourg and Switzerland that are exempt from VAT.
There will also be an extra £6.5bn for companies that are able to take advantage of the discount on the cost of goods and services.
The Treasury said the 1.50% tax rate, as it is known, was introduced in March 2017 to help companies save money by cutting expenses and raising revenues.
The tax has since been cut by about 1.8%.
It is part of a wider economic strategy to bring down the UK government’s borrowing costs and boost growth.
The rate of VAT is calculated on a scale of one to 10.
The ONS said it would also be able to raise about £15bn from lower VAT rates, which were calculated as 10% lower than the rate that the UK currently pays.
Businesses would be able raise the extra money by reducing the number of employees and closing shop.
The VAT rate is calculated using a number of factors, including the cost to the UK of complying with the tax.
It is also based on the number and size of firms, their size and turnover.
The UK has the world’s highest rate of corporation tax, at 22.8%, while the United States is at 10%.
Other countries have lower rates.
The OECD, which represents the world economy, has said that if the UK follows in Germany’s footsteps and cuts corporation tax to a level similar to Germany’s, the OECD could see a rise of as much as £6bn a day by 2025.
“We’re all very keen to see the UK make the transition from a tax system that is very, very low to one that is much more competitive, so that we can have more investment, more exports, less dependency on other countries,” said James Wilson, the UK director for the Organisation for Economic Co-operation and Development.
“That’s what I hope is going to happen.”
The ONSI said it had not set a final date for the first increase in VAT.
A previous increase was announced in January 2019, when the rate was raised to 20%.
Businesses have already started planning for the change.
The International Monetary Fund, which has been critical of the current tax system, has called for a cut to the rate to a “reasonable level”.
The IMF said it was also concerned about the impact on business confidence.
“There’s a real risk that if we have to go back to the way things were in the past that businesses will just close shop,” said the IMF’s Christine Lagarde.
“The impact on the economy, and on jobs, is likely to be significant.”
The tax relief could also benefit other sectors, including technology, finance and healthcare.
The EU has also introduced a special VAT rate of 3% on imports, which will be applied to all products that are exported from the bloc.
But UK manufacturers and suppliers are already feeling the impact of the VAT cut.
The business lobby group CBI said the cut would also hit smaller and medium-sized businesses, as well as some high-value-added sectors.
“It’s a very big hit for UK businesses,” said John Muellbauer, CBI director general.
“For example, if you take a 10% cut to VAT on all goods and if you import 5% of all goods, it’s an effect on the UK as a whole.”
The Office of Fair Trading said it expected the VAT relief would lead to an increase in consumer spending.
“Consumers will be better able to make informed decisions about where and when to spend their money, and more efficient at doing so,” said Joanna Rowland, a spokeswoman for the OFT.
“This could also reduce consumer price inflation and encourage more investment in manufacturing, and higher productivity.”
The UK is one of the only countries where the VAT on goods and drinks is higher than the cost in the EU, meaning that the savings will go towards the UK economy.
The country also has a large share of its domestic economy linked to the agricultural sector, and the UK is the only member of the EU that has its own market for agricultural products.
The levy has also hit food suppliers, which are often one of Britain’s biggest customers.
Some companies are already planning to move to other EU countries, and some food processors have already said they are likely to close.
But a number have warned that it would cost them millions of pounds to move.
The OFT has warned that the cuts could hit UK exporters.
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