Britain’s Chancellor of the Exchequer, George Osborne, defended the increase in sales tax on Tuesday as the "least damaging" way to tackle a budget deficit in excess of 10% of national output.
Business groups have warned that retailers will be hit by the increase, while opponents of the rise have said the poorest will be hit hardest.
Labour has condemned the increase in Value Added Tax (VAT) to 20% from 17.5%, which came into force on Tuesday, as "the wrong tax, at the wrong time".
However, Osborne said the increase would help to shore up public finances, rather than derailing economic recovery. The increase is expected to raise over 13 bln pounds for state coffers.
Analysts said that the poor in the U.K. would be the hardest hit, as the impact of the VAT hike would correspond to about 30 pounds a week more or nearly 14% of their monthly expenditure.
MIXED IMPACT IN CYPRUS
For expats and retirees in Cyprus, the impact is mixed.
Chrysilios Pelekanos, a VAT expert at PwC in Nicosia, told the Financial Mirror that the VAT hike in the U.K. would have both a negative and a positive effect.
“For those living in Cyprus and spending out of Cyprus, obviously there is no problem,” he said.
“There will be a problem, however, for individuals from the U.K. who will see their spending power reduced, either for buying necessities or for their savings, holidays and investments,” Pelekanos said.
“In the case of new retirees, they might see the choice as being more favourable to move to Cyprus, while the 50-55 year olds will see their savings eroded making it more difficult to invest (in a holiday or retirement home).”
“For the services sector, there is no significant impact, as there is no VAT on exported services. However, as a financial services centre, it is the banks that will see a rise in real costs as the 2.5% will be added to their expenses,” Pelekanos said.
“In the long term, the UK government will benefit more from this revenue measure than, for example, the Cyprus government, because we have the Cost of Living Allowance (ATA) and the effectiveness of any increase is reduced because it is set off against a corresponding automatic wage increase,” he concluded.
In similar comments, Martha Lambrou, Senior Tax Manager at PwC in Limassol said that “the VAT hike in the UK should not have a significant impact on expats/retirees living in Cyprus so long as they make most of their spending in Cyprus.”
“In fact this could boost spending within Cyprus and discourage spending in the UK, especially given the fact that now the rate differential has increased to 5%, compared to 2.5% until December 31, 2010,” she said.
