I turn now to value added tax. In my Budget last year I extended the 25 per cent. higher rate, which already applied to petrol, to a wider range of goods, including items such as domestic electrical appliances, television sets and boats. I recognised at the time that not all these items could be regarded as luxuries, but I concentrated the higher rate on the less essential items so that the extra burden of taxation would fall least on those with low incomes. This formed part of a series of changes in indirect taxation which were designed to reduce consumption and so assist in bringing the economy into better balance.
The higher rate of VAT has produced an extra £400 million in 1975–76. Customs and Excise has monitored the impact of the tax since its introduction, and I have received representations about its effect from the TUC, the CBI, the Chairman of the EDC for the electrical appliances industry and others. Although the severity of the 25 per cent. rate was necessary in the especially difficult circumstances of last year, I have decided that in the longer term the 25 per cent. rate is too high. It could damage some parts of manufacturing industry and jeopardise employment.
I have considered carefully all the representations I have received, including those which advocated abolishing the higher rate altogether. However, there are strong arguments against doing this. A return to an 8 per cent. standard rate of VAT would involve a big loss of revenue which would have to be recouped in other ways. To do this by increasing the standard rate to 10 per cent.—a course which has been advocated by the right hon. and learned Member for Surrey, East (Sir G. Howe) and his right hon. and hon. Friends—would put up the prices of many everyday items which are purchased by ordinary working people and by pensioners and other less-well-off members of the community. I therefore propose to leave the standard rate of VAT at 8 per cent.
In deciding the new figure for the higher rate, I have taken several factors into account. If demand for those goods now taxed at 25 per cent. were raised too rapidly, there would be a real risk that British industry could not cope and that the demand would be met by a big influx of imports which would then be difficult to dislodge. This is exactly what happened when the previous Administration removed hire-purchase controls in a single step in the summer of 1971. British industry is still paying for that mistake. I am determined not to repeat it.
I therefore propose to reduce the higher rate, as from Monday next, to 12½ per cent. In choosing this figure I have taken account of the needs of smaller businesses, including retailers. It has been pressed on me, for example, that the 25 per cent. rate has had a particularly adverse effect on smaller businesses such as boat builders and firms which service electrical appliances. The reduction which I propose should be of great help to them—and particularly to poorer people who may have refrained from getting their appliances serviced when the rate was 25 per cent.
I also understand that the many thousands of retailers who sell higher-rated goods prefer VAT rates which provide convenient fractions for calculating. Twelve and a half per cent. gives such a fraction—one-ninth of the tax-inclusive price. At the same time, it is a rate which is more than 50 per cent. higher than the standard rate and, therefore, produces a useful amount of additional revenue—about £140 million in a full year.
The reduction to 12½ per cent. will apply to all goods and services at present covered by the higher rate. Leaving aside petrol, the cost will be £175 million in a full year.
For a number of hard-pressed sectors of United Kingdom industry, this will provide a welcome boost to their domestic market. Notably in the important market for television sets, I am concerned that the United Kingdom manufacturers should benefit. For colour sets, where Japan is the main source of imports into the United Kingdom, the need for a continuity of restraint is well understood between the Japanese and ourselves. But we imposed surveillance licensing on imports of television sets last December, and we shall be watching the position closely in case this understanding proves insufficient.