Conservative MPs suggest breaking manifesto and raising VAT to replace business rates

VAT should be increased to replace revenue lost by abolishing business rates, Conservative MPs - including Yorkshire's Kevin Hollinrake - have suggested.

The Treasury is expected to publish its final report on its business rate review later this year as it considers alternative ways of taxing non-residential property.

Labour has proposed offering discounts to small and medium-sized firms before ultimately scrapping the current business rate system and replacing it.

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But Conservative MPs criticised the lack of detail from the Opposition, with some proposing an increase in the 20 per cent standard rate of VAT for goods and services.

Thirsk and Malton MP Kevin HollinrakeThirsk and Malton MP Kevin Hollinrake
Thirsk and Malton MP Kevin Hollinrake

If such a move was implemented by the Government in this Parliament, it would represent a second manifesto-breaking move on tax following the decision to increase national insurance to pay for health and social care.

Conservative Kevin Hollinrake, who represents Thirsk and Malton, said consumer choices are the “number one thing that’s driving problems for business” as people switch to shop online rather than in the high street, adding the business rate system was built for a “completely different era”.

He welcomed proposals for reform, although suggested an online sales tax might not work in response to the issues raised.

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Mr Hollinrake told the Commons: “We already have a sales tax in the country, which is VAT. It’d be far simpler to use VAT as the mechanism for this.

“To me the simple way to deal with this is to add about three pence to VAT, so increase VAT from 20p to 23p.

“That would, on the face of it, increase the take in terms of VAT to about £20 billion a year – which gets you quite a long way down the line in terms of increasing that revenue in terms of replacing business rate revenue.”

Mr Hollinrake also suggested examining proposals to lower the threshold for when a business must register for VAT, which currently stands at more than £85,000.

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He said: “I think we should look at that again, I think we should look at reducing it significantly. That level in other countries, in Germany for example, is £20,000 – the £85,000 threshold is a real disincentive to businesses to grow.”

Huw Merriman, Conservative MP for Bexhill and Battle, earlier backed calls for business rate reform and noted: “Something has to come in place that brings in the exact same yield.”

Mr Merriman suggested Labour’s proposals were lacking in this detail, adding: “I’m left with the view that I had previously that that means we can look at a tax on turnover on sales – but ultimately the simplest way of dealing with this is actually by looking at the VAT system.”

Liberal Democrat MP Sarah Olney, who represents Richmond Park, said: “Given that the Conservatives committed to not raising VAT in their 2019 manifesto we can surely expect VAT to be raised at some point before the end of this Parliament.”

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Shadow Treasury minister Pat McFadden said it was not clear what the conclusions of the Government’s business rate review would be, but added: “The prospect of VAT-man returning is certainly possible given the contributions we’ve heard today.”

Business minister Paul Scully said Mr Hollinrake had made a “cogent argument albeit a controversial argument”, adding: “At least he came up with a solution that is costed that is thrown into the mix.

“That is the difference between this side and the Opposition side.”

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