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Could the VAT rise drag back economic recovery?

After reducing VAT from 17.5% to 15%, in an effort to assist the UK economy, the government will end this concession on 31 December and UK VAT rates will move back to the former level of 17.5%. While you may think that a 2.5% increase is not something which will impact upon your spending habits, when you consider the UK economy as a whole we are literally taking about billions of pounds being taken out of the pockets of consumers and placed into the government's coffers.

While this additional tax income will at some stage feed through the economy, via the public sector and other government functions, it will not return to the high street and will not be there to assist those companies having cash flow difficulties. Many had believed that the UK government would do yet another U-turn and announced that the 15% VAT rate would continue in the first half of 2010 but this would appear to be less likely as we approach the end of 2009.

Even though 2010 is set to be a pivotal year for the UK economy and UK taxpayers, it may not be until 2011 when we see an increase in indirect and direct tax rates across the UK. At the first sign of economic recovery the government will be forced to increase the tax levy on businesses and consumers in the UK, to reduce the growing budget deficit and pay down some of the national debt.

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