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'Tax freedom day' falls later due to VAT hike

Next week's VAT rise will mean Britons have to wait three days longer than in 2010 before they earn enough money to cover their annual tax bill and start making money for themselves, a think tank has calculated.

The Adam Smith Institute predicted that "tax freedom day" would fall on May 30 2011, meaning the equivalent of every penny earned by the average worker for the first 149 days of the year will go to the Treasury.

It said the longer period - six days more than in 2009 - was almost entirely down to the extra revenues the Government expects to rake in by increasing the sales tax from 17.5% to 20% from January 4. If the calculations prove accurate, it will be the latest the milestone has fallen since 2007 when it stretched into June and has led to calls for targeted tax cuts next year.

Tom Clougherty, the institute's executive director, said: "The Government is right to give priority to cutting spending and plugging the deficit. But as Tax Freedom Day shows, Britons are still desperately overtaxed.

"The fact that we spend almost five months working for the state and only seven months working for ourselves and our families is a shocking indictment of big, wasteful government.

"As well as hitting every household in the country, the VAT hike is going to dent consumer confidence and put a dampener on our economic recovery - as the Office of Budget Responsibility has already pointed out."

Dr Eamonn Butler, director of the institute, said: "The coalition should examine the possibility of making targeted tax cuts now to encourage economic growth.

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"But in the long term, they need to fundamentally overhaul the entire tax system. Lower, simpler, flatter taxes would be fairer for individuals, and better for the economy."

Chancellor George Osborne earlier this month tried to dampen expectations of tax cuts ahead of the general election scheduled for 2015 such as a reversal of the VAT hike amid suggestions he was building a pre-poll war chest.

He said that the VAT hike was "not temporary" but a structural change to the tax system which was needed to deal with the deficit and that taxes would be reduced only if there was a surplus in the public finances - something the Treasury does not expect during this Parliament.

Firms across the UK have been preparing for the much-dreaded increase. The Institute of Chartered Accountants in England and Wales (ICAEW) urged small and medium-sized businesses to ready themselves for the change.

Frank Haskew, head of tax at ICAEW, said: "Having to change the VAT rate is not a good way to start the new year.

"Many firms will be worried about the effect on sales in the first quarter but preparation is the key to help ensure the transition is smooth."