Research published today by the Office for National Statistics examines the relationship between the equivalised disposable income of the richest and poorest UK households and the VAT spent by those households.
Overall, the data shows the poorest fifth of households in the UK pay more in VAT as a percentage of their disposable income than the richest fifth.
However, the analysis highlights changing spending patterns. Poorer households in 1986 spent a smaller proportion of their expenditure, than poorer households in 2009/10, on discretionary items which attracted VAT.
For example, after taking into account changes in prices, the poorest fifth of households spent, on average, around 250 per cent more on new cars, holidays abroad, meals out, audio/visual goods (including TVs) and photographic equipment combined in 2009/10 than in 1986. This is compared with an increase of 20 per cent for the richest households.
The analysis reveals that in 1986, the poorest fifth of households spent 55 per cent of their weekly expenditure on non-VATable items, compared with 45 per cent on VATable items.
However, in 2001/02, this pattern had reversed. The poorest fifth of households spent, on average, 42 per cent on items which did not have any VAT levy compared with 58 per cent on items which did.
In 2009/10 this reversal was still evident, although to a lesser extent, as the poorest households spent, on average, 45 per cent of their total weekly expenditure on items which did not attract VAT, compared with 55 per cent on those which did.
The research extends to 2010, but does not include the current 20 per cent rate of VAT introduced in 2011.
For the richest fifth of households there was no marked change in the proportion of their expenditure on VATable compared with non-VATable items over the period.
David Breger of HW Fisher & Company chartered accountants, said:
"This latest piece of research reinforces what is widely perceived to be the fundamental inequality at the heart of VAT: the poorer pay more of it relative to their incomes than the wealthy.
"It's clear that the Government needs to reconsider the full effect of VAT, which is inherently regressive. But as yet nobody has been able to come up with a suitable solution.
"In a strong economy, VAT is arguably less of an issue but at the current time, in a desperately weak economy, its effect on households' incomes is being significantly magnified.
"It's all well and good to raise VAT to boost the Treasury's coffers, but if doing so chokes the economy at source and undermines confidence, then questions have to be asked."
