The imposition of VAT on groceries is being actively considered by Whitehall officials as a radical means of reducing the national deficit.
The feasibility of introducing the food tax is being raised informally between civil servants, industry bodies and retail insiders.
So politically-sensitive is the move that all the talks are occurring “under the radar”, according to retail industry insiders.
Basic supermarket groceries are currently immune from VAT, along with books, newspapers and children’s clothes.
However a VAT levy on food of between three and five per cent would raise billions of pounds in tax and help reduce Government borrowings, which are expected to hit £180 billion this year.
Food sales from supermarkets are estimated to total £120 billion a year.
The tax would be controversial as it would disproportionately affect poorer families. Any move to impose it would be vehemently opposed by the UK’s large food retailers, who argue that it would be a ‘tax on living’.
Justin King, the chief executive of J Sainsbury, said this weekend that a tax on groceries would be a “very bad idea”. Another supermarket executive said last night that the tax would be “political dynamite”.
The topic is being tentatively brought up in Whitehall as politicians, lobbyists and civil servants examine possible ways of raising revenues, according to multiple retail industry sources.
An increase in headline VAT above its current 17.5 per cent level is also being mooted.
One senior industry executive said: “VAT on groceries is being talked about in very tentative terms, rather than as a formal consultation. But it is happening in all parts of Whitehall. It is informal and sensitive. It is such a red hot topic.”
“They are thinking the unthinkable. It might not happen, but don’t think that people are not having that conversation. They are.”
A Treasury spokesman said that there was “absolutely no question” of the current Chancellor imposing VAT on groceries.
“It is not remotely on the table,” he said.
However civil servants are examining all the permutations available to the next government to bring in revenue following the election.
The food industry is against the move. Mr King said: "On food, VAT acts in a very regressive way. The poorer you are, the higher the proportion of your household income you spend on food.
“So if you were to introduce VAT on food that would be very damaging for the poorest in our society. So I think that would be a very bad idea and I think most governments would understand that.”
A second supermarket chief executive said: “My view is that it would be totally inappropriate. You are taxing what people have to eat to live. Groceries are not discretional spend.”
He added that if the new tax were imposed, retailers would have to pass it on to customers in the form of higher prices.
It is understood that the British Retail Consortium (BRC) is in the process of compiling a major report into the impact on the consumer economy on both direct and indirect taxation. The report will be published prior to the election.