Letter: A dangerous change to original Tory VAT principles

Sir: In the present controversy over VAT it is important to recall the principles on which it was originally based. When Iain Macleod and I (with important advice from Arthur Cockfield) planned the tax, which I subsequently steered through the House of Commons when Anthony Barber became Chancellor of the Exchequer, our aim was clear. We were determined to replace Selective Employment Tax and Purchase Tax with a less discriminatory system consistent with Conservative principles.

We therefore decided that the UK's VAT should have two essential features. First, in order to ensure the tax and the changeover were not regressive, we decided to zero rate items of particular importance in the expenditure of low-income families: food, fares, fuel and housing (together with children's clothes and books and newspapers - 'no tax on knowledge').

We believed that, unlike Purchase Tax or VAT elsewhere in Europe, the tax should not distort the way in which consumers wished to spend their income. We therefore rejected the idea of multiple rates in favour of a single positive rate, of 10 per cent. The rate has since been increased a number of times but, except for a brief period under Labour, the basic structure of the tax has remained unchanged.

Norman Lamont, in his last Budget, proposed to change this structure by charging VAT on fuel, at 8 per cent from next April and 17.5 per cent the year after. The subsequent controversy has centred on the effect of this on pensioners and those on low incomes. Politically, the important thing now is for the Government to produce a compensation scheme that is generous, even though it will substantially erode the revenue from the change.

But the precedent created by abolition of the zero rate on fuel is dangerous. If, tactically, revenue has to be raised or lowered to manage the economy, the change should be in tax rates, not tax structure. This is particularly true in the case of VAT, because the European Community will not allow a zero rate to be restored once it has been abolished. And the fact that a major zero rate has been abandoned will increase pressure from the Community to abolish all our zero rates.

Moreover, there is a danger that the outcry against VAT on fuel leads to VAT being charged on it at 8 per cent, but not 17.5 per cent. We should then find further pressure for a discriminatory multi-rate system, which is precisely what we got away from when the original reform of indirect taxation was introduced.

It is therefore most important in the forthcoming Budget not to make any further changes in the structure of VAT. If the Chancellor believes more revenue must be raised next year, it would be better, both politically and economically, to go straight to 17.5 per cent on fuel next year, with correspondingly generous compensation for those on pensions and those least able to pay. Any other changes should be to tax rates, not tax structure.

One of the reasons why I believe John Major is the right man to be Prime Minister is that he shares many of Iain Macleod's ideas and ideals. I hope he, and his Chancellor, will continue to do so, particularly as far as tax policy is concerned.

Yours faithfully,

TERENCE HIGGINS

MP for Worthing (Con)

House of Commons

London, SW1

10 October