UK VAT report could be bad news for Malta

A think tank in the UK has urged the British government to extend VAT to food, baby clothes and books as part of an overhaul of the UK's tax and benefits system.

A report by the Institute for Fiscal Studies, which called for VAT to be extended to most goods, said consumers could be reimbursed for the extra VAT they would pay by increased benefit payments and reduced income tax.

The simplified system would save the Government about £3 billion a year, it claimed.

The proposal, should it come to fruition, could be bad news for Malta.

In March last year, the government won a hard-fought battle in the EU to keep foodstuffs and medicine free of VAT.

VAT is normally paid in the EU on all foodstuffs and medicinal products. The only exceptions are the UK and Ireland, which had both obtained a permanent derogation, and Malta, which had been given a temporary derogation until the end of 2009 that was later extended.

Under the new arrangement, Malta was assured it could keep its current zero-rated VAT regime as long as the UK and Ireland kept theirs.

The institute's wide-ranging report said: "Britain's tax system is ripe for reform in ways that could significantly increase people's welfare and improve the performance of the economy."

It also calls for income tax and national insurance to be merged and for the benefits system to be simplified to make it easier for people to understand and make claims.