Starter activity - percentage changes and the VAT rise

Many thanks to Steve Whiteley for suggesting a topic starter activity that can help students practice those trick percentage change calculations.

Students often struggle with percentage changes. Here is a topical example in a multiple choice format:

As the standard rate of VAT increases from 17.5% to 20%, what is the percentage increase in the amount of tax actually collected on a taxable item?

(a) 2.0%
(b) 2.5%
(c) 3.5%
(d) 14.2%

As a journalist pointed out this week the answer is, of course (d) and just goes to show how a small percentage change in the tax rate makes for a much larger increase in the actual amount of tax levied. An interesting discussion could be had about what might happen to the UK Government VAT revenue overall, bringing in price elasticity of demand and the issue of whether retailers might partly absorb the VAT by accepting lower gross profit margins.

It would be useful to discuss those items which are exempt from VAT or which attract it at a reduced rate.