Europe wants to end UK's VAT breaks
Baker Tilly’s David Wilson warned that the UK’s muti-rate VAT regime will come under pressure at the European summit this week.
In a country-specific policy statement issued earlier this month, the European Council said, “To assist with fiscal consolidation, consideration should be given to raising revenues through broadening the tax base.”
However, Wilson dug around and uncovered a European Commission working document accompanying the official announcement that made it very clear that “broadening the tax base” meant VAT. This has been on the EC’s agenda for some time, but so far the UK has resisted reforming its VAT base, despite the country’s unsustainable budgetary deficit.
According to the commission, not applying the standard rate across the board costs the UK Exchequer £44.8bn a year. While keen to see some action on this front, the recommendation offers the sop of a provision in the VAT directive that allows member states to apply a reduced rate of VAT to those previously taxed below 5%.
“Such a policy choice would minimise any inflationary effects of an immediate move to the standard VAT rate, as well as lessen the impact on the most vulnerable in society,” the commission said.
The recommendation that the UK remove zero rating for food, books, children’s clothes, drugs and aids for the handicapped does not come as a punishment for David Cameron’s efforts to block the election of Jean-Claude Juncker as head of the European Commission, but as a result of measures that emerged from the annual European Semester policy process.
The semester is a cycle that starts with a European Commission review leading to country-specific recommendations that are discussed by member state ministers in June. They then go forward to the council of European leaders in July, and according to the intended sequence, the recommendations should be incorporated by national governments into their budgets and reform plans for the next year.
In Baker Tilly’s Weekly Tax Brief, Wilson commented, “Mr Cameron and his aides will be quick to point out that these ‘are only recommendations’, and that such ‘interference’ illustrates why the choice of the EU Presidency is of such importance to protect the UK’s fiscal autonomy.”
This might be a valid point, Wilson added, “But the recommendations were last week endorsed by Ecofin, where the UK was represented by the Financial Secretary to the Treasury. Such UK endorsement would seemingly undermine the PM’s negotiating position at the European Council.”
In the circumstances the topic will be politically very sensitive, but recent conversations on AccountingWEB and elsewhere have highlighted all the strange VAT rating anomalies that have fuelled many a tax tribunal (and trivia quiz).
In a recent report called Tax Without Design, IFS director Paul Johnson echoed Europe’s stance and noted how attempts to reform the “damaging system of VAT exemptions” have met concerted opposition in this country. The “pasty tax” backlash that followed the 2012 Budget probably set back the cause of VAT reform, he added, and left in place the “absurd” differences that can occur between similar products. For example chocolate bars, potato crisps and dried fruit for snacking are subject to 20% VAT, while chocolate body paint, roasted vegetable crisps and tortilla chips, and dried fruit for home baking all face 0% VAT.
“A system that creates these sets of distinctions does not look like someone designed it on purpose,” Johnson told a CIOT meeting in London last month.
But the one that got the strongest reaction from AccountingWEB members on our recent VAT myths article was the prohibition of zero ratings for articles of children’s clothing made of skin if they contain fur from Tibetan, Yemeni or Mongolian goats. (Please refer to HMRC’s Furskin Flowchart to determine the correct VAT rating).
As JPMLondon commented, “Looking for obvious, straight-forward sense in whether gingerbread men have belts and whether a Mongolian goat has been involved in making a piece of children's clothing as a determinant of taxability is not a sensible endeavour...”
No one was quite sure whether to blame HMRC or Europe for these anomalies. But AccountingWEB member JCresswellTax, among others, saw their lighter side - almost as symbol of professional expertise - commenting, “No wonder I love working in tax.”
Will the European Commission be bringing all of this fun to an end?
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