EU budget plan may see 1% VAT hike

New money-raising plans for the European Union could mean an extra 1% on VAT in Britain.

At the moment 0.3% of VAT on every pound spent goes directly towards the EU budget.

But under European Commission proposals to increase its revenue-raising powers, that could grow to 1.3% - a sum almost certain to be passed on to consumers if the plans are approved.

The European Commission's seven-year budget proposals from 2014 have already caused an outcry, estimated by the Treasury to amount to a "completely unrealistic" extra 11% on the British net contribution.

That means finding another £1.4 billion a year - the first two years of which would have to come from the belt-tightening national spending review programme under which Chancellor George Osborne has already allocated drastically-reduced funds.

But the EU plan also includes controversial moves to step up Brussels' direct revenue-raising powers, through a new EU levy on European banks - a "Financial Transactions Tax" - and by increasing the EU "take" from national VAT income.

Currently the EU gets 0.3% of the nation's VAT receipts.

Under the Commission plan, that would go up to 1.3% - money which could either be absorbed by the Treasury or passed on to taxpayers by raising standard-rate VAT from the current 20% to 21%.

As the EU budget proposals were being finalised at Commission headquarters last month, Eurocrats suggested that the extra 1% VAT "take" for Brussels should be itemised separately, to make the public aware of their direct contribution to running the EU.

According to insiders, Britain's EU Commissioner, Baroness Catherine Ashton, raised objections and the idea was dropped from the budget proposal.

But much else is still to be battled over in what is being seen as an inflation-busting spending round at a time of major national cutbacks to fight the economic downturn.

Prime Minister David Cameron warned Commission President Jose Manuel Barroso at talks in Downing Street days before the proposals were unveiled that the public would not understand anything above an EU spending increase in line with inflation - a real-terms freeze.

And after publication, a Downing Street spokesman condemned the plans in a statement reminding Brussels of a letter published last December by Britain, France and Germany, urging that the EU creed "should not be to spend more, but to spend better".

The other battleground in the coming months of budget bartering between the Commission, the European Parliament and EU government ministers is the British rebate, which has knocked billions of pounds off the UK's EU bills for more than 25 years.

It currently saves the country more than £3 billion a year and, as negotiated by Mrs Thatcher in 1984, is a permanent part of the EU budget system.

The Commission says the rebate is no longer necessary, but UK officials say the justification remains - UK payments to the EU kitty are disproportionately high, with the Treasury paying twice as much to the EU budget as France, and one and a half times as much as Germany.

Now the Commission wants to offer the UK a lump sum to end the current agreement and make any future rebate re-negotiable at each budget review.

The UK would temporarily get even more back than it does now - but face an uphill struggle to get anything back at all in future EU spending review rounds.

As the UK and other member states brace for months of budget wrangling with the Commission and MEPs before final figures are agreed, the Commission vigorously denied that it is planning a massive increase, arguing that the calculations of many national Treasuries use different criteria as the basis for comparing current and future spending.

Commission officials say the projected annual EU budget of £126.5 billion amounts to about 1% of the combined GDP of the 27 member states- the same GDP share as the current EU budget.

But national number-crunchers say that means a significant rise, as GDP has been growing in the member states.

They insist that, in cash terms - depending on the base year and whether some EU policies count as "off balance-sheet" as the Commission insists - the budget proposal represents an increase of about 11%, way above inflation.

A Commission spokesman said: "Our proposal is solid, is responsible and is designed to make a difference for Europeans in the years to come after the crisis."

He said the budget plan for 2014-2020 "stabilises the purchasing power of the EU budget at the 2013 level".

However, UK officials say the reference year for EU leaders' demands for a freeze was the current 2010-2011 budget.

The Commission spokesman acknowledged: "We see that many are now reacting to it (the 2014-2020 budget plan), giving their views on and interpretations of the policy proposals and the figures.

"These views and interpretations are not always concurring, which is quite normal in what is the beginning of a negotiation on the basis of our proposal.

"We will now take this forward in the framework of the negotiations, and not in the press."

Conservative leader in the European Parliament Martin Callanan said a larger tax take from Britain to fund Brussels would hamper national economic recovery:

"This just goes to show how utterly out of touch with real people the Brussels bureaucrats have become.

"In these difficult times people just can't pay - won't pay - more taxes to fund more European empire-building."

He went on: "The whole budget proposal is an arrogant attempt to squeeze more cash out of hard-pressed taxpayers, but the plan for a specific Euro VAT, going directly to Brussels, is simply an insult.

"It would hurt businesses and their customers equally and put a dead hand on economic recovery."

UK Independence Party MEP and leader Nigel Farage said: "This is vintage Eurocrat behaviour. They are planning to whack up the cost of Britain's EU membership by fiddling with the VAT, but they don't want anybody to talk about it. Cathy Ashton has gone so far as to veto any attempts at transparency.

"The choice for the UK Treasury is pretty painful if this goes through. Either they have to take the hit themselves, hurting more public services across the country at a time of increasing austerity, or they will have to pass on the costs direct to the consumer, when household budgets are at record lows."

There was another option, he said: "They (the Government) could let us have the promised referendum and stop this carry-on once and for all."

John Walker, national chairman of the Federation of Small Businesses, said: "The economy is in a fragile state with consumer confidence, small business profits and employment intentions all at a low.

"Increasing VAT by another 1% would only further this downward trend, when we should be looking to stimulate small businesses and consumer spending.

"Small firms do not have the capacity to absorb VAT rises like big businesses, and so are put at a disadvantage.

"If we are to really grow the economy, the FSB urges the Commission to scrap this rise."

A Treasury spokesman said: "The Government believes the European Commission's proposals are unrealistic. We oppose any new tax to fund the EU and these proposals are unacceptable. Tax is and should remain a matter for sovereign governments."