Philip Hammond considers risky course with VAT and diesel tax shake-up

Posted On: 
11th November 2017

Philip Hammond is sounding out the implications of a Budget revamp of VAT for small firms that could raise up to £2bn a year for the Treasury.

Philip Hammond will aim to avoid another quick policy U-turn in this year's Budget
PA Images

The Chancellor is thought to be seeking means to lower the £85,000 turnover threshold to VAT toward international standards, like the European Union average of £20,000. 

But the move will risk the ire of small businesses – and many of the same individuals who were angered by his attempt to increase national insurance contributions for the self-employed in his first Budget.

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Mr Hammond was then forced into an embarrassing reversal of the policy.

The Office of Tax Simplification this month reported that “bunching” by companies claiming turnover just below the current threshold was causing “a distortionary impact on business growth and activity”.

The Chancellor is also mulling tax changes to disincentivise emissions from diesel cars. 

A number of options are on the table, including a fuel duty increase and a change to vehicle excise duty on existing diesel cars – the tax on new cars is already set to increase.

He may also roll out a cut in the duty on petrol cars to ameliorate the backlash to any increase on diesel. 

Edmund King, the president of the AA said: “It is ridiculous to further demonise diesel via differential taxes when drivers are already voting with their wheels. Some 41 per cent of AA members own diesels but that drops ... to 16 per cent when drivers are asked what fuel their next car will run on."

RAC chief engineer David Bizley dubbed the plan “a terrible, misjudged knee-jerk reaction”.