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Fall in tax receipts means VAT to rise as planned

There seems no prospect that the cut in VAT will be extended beyond the planned end of the year reversion to the old rate after it was revealed that tax revenues have fallen sharply.

Figures showed that the government borrowed £8 billion in July when the tax take is usually at a high.

Although the government has already predicted a public finance deficit of £175 billion for the current year, some analysts are forecasting a gap of as big as £200 billion.

Against the backdrop of a significant deterioration in state finances, the Treasury moved to re-affirm that the VAT cut, which saw the standard rate drop from 17.5 per cent to 15 per cent, will lapse, as planned, on 1 January.

For this year, the VAT reduction will end up costing the government some £12 billion in revenue.

A number of business groups have been lobbying for an extension to the reversion to the old rate or at least a delay in its timing.

But it is thought the Chancellor, Alistair Darling will give greater weight to concerns over the scale of the UK’s debt among the international money markets.

Figures from the Office for National Statistics revealed that VAT receipts for July were down 33.8 per cent on the same period last year.

Other business taxes have declined as well. Corporation tax yielded the exchequer 37.9 per cent less than a year ago, slumping to £6.3 billion as a result of diminishing profits, while income from National Insurance contributions also fell.