Thursday, 6 January 2011

What is the VAT increase?

Is it 2½%? Or is it actually 2.13% Or is it 14.3%?

The headlines tell us that VAT has gone up this week by 2½%. What this means is that the rate of value-added tax being applied to most goods and services has risen from 17.5% to 20%.

But from the purchaser's perspective prices will rise only by 2.13%. How does that work? Well, imagine an item costing £100, to which VAT must be added. Last week, with VAT included this would have cost £117.50; this week it costs £120. So, the purchaser pays an extra £2.50 on a previous price of £117.50, that's an increase of only 2.13% [2.50 ÷ 117.50 × 100 ≃ 2.13].

But from the government's perspective, the amount of tax being collected has gone up by a staggering figure of 14.3%! How does that work? Well the £17.50 they would have collected last week on the £100 item has increased to £20. The additional £2.50 is a 14.3% increase in the VAT being charged [2.50 ÷ 17.50 × 100 ≃ 14.3].

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