28/05/2012 19:53 BST | Updated 28/05/2012 22:56 BST

Pasty Tax Scrapped As Government Makes VAT U-Turn

The Government has signalled retreat on controversial tax rises on pasties and caravans, in a move costing the Treasury £70 million.

Following a post-Budget consultation on closing VAT loopholes, the Treasury said it would be modifying its plans to charge VAT on hot food and static caravans.

The moves won praise from coalition backbenchers - some of whom rebelled against the government in the Commons - but were mocked by Labour as U-turns from a shambolic government.

The policy changes will mean food left to cool naturally will not now be subject to VAT, while static caravans will be charged VAT at only 5%, instead of 20%. Combined, the measures are expected to mean about £70 million less in revenue for the Treasury.

Treasury sources said the figure was small in comparison to a Budget which included a £3.5 billion giveaway to people on low incomes and £2 billion cuts in spending.

But Labour said it showed the government was a shambles.

Shadow Treasury minister Chris Leslie said: "I think they were forced to listen to the total bewilderment of the public who were completely astonished at these rather odd decisions.

"The other reason they have made this decision is the Commons is in recess, so there is no ability to challenge them in Parliament.

"On the Wednesday when the Commons returns, there is scheduled to be a vote that we have put down on the caravan tax - it was a narrow majority of only 25 last time, so they were facing defeat.

"They are not U-turning out of the kindness of their hearts, it is because they are being forced to do so.

"What a chaotic way to run a country. How on earth can you have a budget process that unravels in a day when you've got this kind of shambolic business?"

Mr Leslie said the policy the Government still needed to fix was what Labour claims is a tax cut for millionaires - the cut in the top rate from 50p to 45p

But Treasury Minister David Gauke defended the changes, teling the BBC: "We've listened to the case that was put to us. On VAT our aim has always been to remove anomalies.

"One of the anomalies we have sought to remove is the fact you pay VAT on your hot chicken or pie in a fish and chip shop, but you don't in a supermarket. What we've managed to do is improve the test so those bakers who produce a Cornish Pasty or hot sausage roll and let it cool over the course of the day, they are not going to face VAT.

"In the great scheme of things, if you look at all the changes we have announced, with the two changes we have made today, we have still got a fiscally neutral budget - we are not borrowing any more than we previously planned and we are still able to afford the big increase in the personal allowance for income tax."

The move was welcomed by government MPs who had campaigned against the extra imposition of VAT on caravans.

Tory Graham Stuart, MP for Beverley and Holderness, said: "We are delighted. It is a victory for the campaign to persuade the government to think again.

"It is great news for the manufacturing industry and also for the park and coastal communities all around the country."

Cornish Liberal Democrat MP Stephen Gilbert welcomed the pasty tax move after tabling an early day motion and raising the issue at Prime Minister's Questions.

He said: "The Cornish people have won and there will be dancing in streets from Land's End to the Tamar as people hear that the Government has dropped their plans to clobber local people and local businesses with this tax.

"This alternative, that I proposed in meetings with the minister and through parliamentary debates, is a workable solution that creates a level playing field with other sorts of hot food and won't endanger jobs, investment or growth."

John Mann, the MP who accused the chancellor of being out of touch with ordinary people has welcomed the U-turn on the pasty tax levy.

He said: “This issue left George Osborne and David Cameron exposed. The budget did nothing for ordinary people and the pasty tax levy epitomised this. This U-turn is the only route possible for the pair”.

Revealing the new proposals, a Treasury spokesman said: "The Budget announced a consultation on a change to VAT on hot takeaway food, designed to remove inconsistency and ambiguity in the system and level the playing field across the takeaway food market.

"After extensive engagement we have improved the policy, addressing practical concerns, ensuring that the new regime could be as simple as possible to apply.

"We have addressed these in a way that allows us to remove the inconsistent VAT treatment, while not imposing any additional requirement on businesses to test the temperature of their products."

Under the new proposals, VAT will be charged on all food provided hot for the purposes of allowing it to be eaten hot, or food which is cooked hot to order.

VAT will also apply where food is kept hot in hot cabinets, on hot plates, under heat lamps etc, or where heat is applied in order to slow the cooling process.

It will also apply where food is provided in heat-retaining packaging or other packaging specifically designed for hot food - an example would be foil-lined takeaway packaging for Indian and Chinese takeaways.

Food advertised as hot is also subject to VAT.

On static caravans, the 5% rate is being introduced to acknowledge the uncertain boundary between residential and non-residential caravans.

The VAT changes for static caravans will also be delayed from October to April 2013.

On Twitter, shadow chancellor Ed Balls said: "After tonight's Budget U-turns we need rethink on biggest Budget blunders - tax cut for millionaires and lack of jobs and growth plan."