Labour’s Potential VAT Raid Raises Fears of Massive Revenue Extraction

Tax grab: Shadow Chancellor Rachel Reeves

A tax-raising Labour government could find the nest egg it needs for a bigger state by slapping VAT on goods and services currently exempt or on reduced rates. Such concessions are estimated to cost the Exchequer up to £100 billion a year.

In a recent report, the Institute for Fiscal Studies (IFS) highlighted the potential for Labour to stage a multi-billion pound VAT grab.

Labour leader Sir Keir Starmer has already shown a willingness to use VAT as a political and economic tool with his pledge to end the exemption from VAT and business rates for independent schools, which he claims would raise £1.7 billion for state education.

According to the IFS research for the UK innovation agency Nesta, VAT is an appealing tax-raising tool due to its distortions and high compliance burden.

Shadow Chancellor Rachel Reeves is working with tax experts to identify “loopholes” in tax reliefs enjoyed by entrepreneurs. VAT rises could be one of the options she considers.

The IFS argues that VAT exemptions, including food, financial services, and newspapers, distort spending and production decisions in unfair ways. The current system has led to costly court battles over exemptions for items like Jaffa Cakes and flapjacks.

While VAT is seen as an economically efficient tax, many believe reform is overdue. Labour’s focus on independent schools suggests they are willing to challenge the status quo, and financial services’ exemption could attract their attention.