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VAT’s life: 50 years of the nation’s favourite tax

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Happy birthday VAT! Value-added tax is another year older, but seemingly not any wiser. Richard Hattersley considers if the byzantine tax will ever become simpler. 

31st Mar 2023
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Congratulations VAT. Yes, everyone’s favourite indirect tax celebrates its 50th anniversary on 1 April – April’s fools day, appropriately. After all, many accountants have felt like a fool dealing with the complex queries and trying to untangle the confusing business tax. 

A party for VAT

People may moan about VAT, but I think we should mark the golden jubilee of the nation’s favourite indirect tax with a party to celebrate its baffling and highly contested existence. 

Grab your plate and head straight to the buffet. The 50th bash for VAT will have a selection of all your favourites:

  • Jaffa Cakes (of course!)
  • gingerbread men (with no chocolate buttons)
  • mega marshmallows (as long as they’re for roasting and not for snacking)
  • turnip crisps (not standard-rated potato crisps)
  • fruit salad (with strict instructions not to blend it into a standard-rated smoothie) 
  • yoghurt for dessert (but guests are advised not to eat the pudding before it has defrosted, otherwise it is standard rated).

All of this will be served with some tasty zero-rated chocolate Nesquik (banana and strawberry flavours are not available here). 

Sadly, though, I don’t think many accountants would turn up. Perhaps out of spite, having been cornered at many family functions and networking events and forced to retell the Jaffa Cake biscuit or cake verdict like it’s their party trick. 

While VAT has given the accounting profession plenty of stories to share over the dinner table as their Cornish pasties cool down and has added a cool £157.5bn in 2021/22 to the government’s coffers, perhaps the best gift it could give on this special occasion is an overhaul.  

History of VAT

Despite reaching 50, and starting to feel its age, VAT isn’t considering any radical facelift – and certainly not any botox treatment either, the main reason being that while some medical procedures qualify for exemption, that’s not the case for cosmetic reasons. 

No, VAT stubbornly refuses to iron out the wrinkles and show any form of simplification. It’s no wonder then that many accountants start VAT conversations with clients with a long sigh.  

Those cursing VAT have France to blame. It was first introduced in the 1950s by the French tax authority and it was then extended to the European Economic Community in 1967, before finally reaching UK shores in 1973. 

Over the course of that half-century, VAT has seen some tinkering. The Labour government in 2008 temporarily cut the standard rate of VAT from 17.5% to 15% in response to the global recession, then the current government pulled a similar trick during the Covid lockdown when the then Chancellor Rishi Sunak reduced VAT for hospitality businesses to 5%.

Squeezed in between that was Brexit. Alongside vast sums of money splashed across the side of buses, VAT became a political football during the Brexit debate, with pledges of scrapping the “unfair and damaging” VAT on fuel bills printed on leaflets and heralded as a benefit of leaving the European Union. 

But when the UK officially cut ties with our VAT friends on the Continent, the only notable changes of this beloved tax on 1 January 2021 was the scrapping of the 5% rate on sanitary products – although research from Dan Neidle found that the abolition led to no more than 1% of the VAT savings being passed to consumers.

And the reality, so far, is that aside from a lot of headaches when exporting goods to the EU and being the inspiration for a 22-part Brace for Brexit series on AccountingWEB, not an awful lot has changed with what is a pretty big cash cow for the UK government. 

Incremental changes

Despite enduring seismic political events – from the financial crash to Brexit and Covid – VAT rules have for the most part frustratingly stuck in the 1970s. 

That’s not to say the VAT guidance is obsessed with the rating of Vivienne Westwood fashion and the Sex Pistols, but as the Glanbia Milk vs HMRC first tier tax tribunal on flapjacks last year demonstrated, the judge was influenced in their decision by HMRC internal guidance that said, “All flapjacks in general should be classified as cereal bars, but for historical reasons an exception will be made for a category of flapjacks that are of a kind that was made and known in the 1970s.” 

Although this inflexibility has been tested with the rise of digital services, online marketplaces and e-commerce. For example, take the reduction of e-books, digital magazines and e-newspapers to zero rated in the 2020 Budget, to problems arising on Any Answers around adult subscription website OnlyFans and other online trading clients. And VAT was given a digital gloss last year with MTD for VAT becoming mandatory. 

No sign of simplification

So, while there has been incremental change, it’s probably not enough. The now disbanded Office of Tax Simplification (OTS) was set the task of reviewing the operation of VAT in 2016 by the then Chancellor Philip Hammond and made 23 recommendations that could not be implemented under EU law and would bring some “highly desirable simplifications”. 

So far so positive. Right? The report dedicated a lot of attention to the VAT threshold, including the revelation that “the high level of the threshold is having a distortionary impact on business growth and activity”. 

The OTS noted that the UK’s £85,000 registration threshold is higher than the average in the EU of £20,000. The effects of this are businesses hovering under the threshold will limit expansion – either closing doors for a period or not taking on extra work – to avoid the economic and administrative impact of entering the VAT system. 

Both raising and reducing the threshold would come with complications – either increase compliance costs for unregistered businesses or a significant loss of funds for public services. 

The OTS’s solution was a “smoothing” mechanism for businesses, plus it encouraged other considerations for HMRC to improve the clarity of its guidance and for the government to take a comprehensive review of the multiple rates. All very sensible solutions. 

But several years on and the suggestions are gathering dust somewhere in Horse Guards Road and the fact the OTS is now but a memory tells you all you need to know about whether any of these recommendations will become a reality. 

The ‘no tinkering’ approach doesn’t work

The government has taken a “no tinkering” approach to VAT and its only outing in recent Budgets is to say the threshold has been frozen again. Perhaps the government doesn’t want another pasty-gate on their hands and has decided to let VAT be, or maybe any decisions about VAT rarely get past the £157.5bn it raises in revenue. 

So, once we’ve finished eating all the Jaffa Cakes and had the inevitable and always contentious argument at any family party over the interpretation of the guidance for some food, perhaps the greatest gift the government can give VAT on its 50th birthday is to just reform it. 

What are your thoughts? Should we stop tinkering or should the UK embrace the benefits of Brexit and reduce the administrative burden of the nation’s favourite tax? 

Replies (8)

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By Jack the Lad
31st Mar 2023 10:48

Let us not beat about the bush: VAT was created to satisfy our masters in Brussels and to create jobs for the unemployed. Before then we had a reasonably workable arrangement withPurchase Tax, which had to be charged only to unregistered businesses or individuals.

Yes it should be simplified by going back to that and certainly increasing the threshold. This would go a long way towards reducing the burden on business and might even allow smaller businesses to expand, thus increasing employment and the tax take.

Is this too simple or am I missing something?

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By SteveHa
31st Mar 2023 11:09

You forgot all about supplies to customers (B2C) outside of the UK being when the place of supply is where the supplier belongs, except where it isn't.

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By ireallyshouldknowthisbut
31st Mar 2023 12:04

Well happy birthday.

Its a fantasy that replacing VAT with a different type of tax would be demonstrably better.

Its just going to create a different set of issues, plus a massive transitionary problem. Most of the issues arise due to different rates for different things, so the biggest way to cut it all out would be to make it universal, ie everything has VAT on it.................that wont end well.

The potential VAT "Benefits of Brexit" are as illusionary as the benefits of MTDfIT, just another fantasy to project rose tinted views of the past upon.

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Tornado
By Tornado
31st Mar 2023 13:26

Happy Birthday VAT

I have copies of all of this firm's VAT Returns that I have prepared going back to 1st April 1973.

Our first period was for four months with Output Tax of £191.45 and Input Tax of £12.76.

I also note that there were 17 Boxes to complete on the Return and a further 5 for those using Retail Schemes and partial exemption, all completed by hand of course.

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By Hugo Fair
31st Mar 2023 17:01

No UK govt in my memory (and I suspect before that) has actually reduced the administrative burden of any of our taxes - favourite or otherwise.
And they're highly unlikely to do so without a radical (or revolutionary) rewrite that starts with a blank sheet of paper which, even then, would remain uncluttered for only a brief time.

Why?
Because it's generally not the taxes that are complicated, it's the ever-expanding volumes of amendments (additions, exceptions, definitions) that make it so.
Every single 'extra' simply becomes another opportunity for those interested in interpretation (whether as lawyers, agents, tax payers or collectors) ... and the impact as these multiply compounds the complexity.

It was always thus - even before the 'glorious' arrival of VAT - I well remember (in the 2nd half of the '60s) how unsigned bands would approach an independent record manufacturer and ask them to make 99 vinyl copies from their acetate. The point being that someone had noticed if the 'run' was fewer than 100 then there was no PT.

The more laws and more definitions .. the more loopholes (that result in more regs), etc!

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By Paul Crowley
01st Apr 2023 14:54

What a coincidence.
Yesterday an old friend emailed me that it was 50 year since we hiked to Salisbury, seeing Stonehenge on the way.

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By Beef curtains
01st Apr 2023 20:09

The price of our joining the undemocratic socialist super state now known as the EUrinal. We're out but we've still got one of the most work creating, illogical sales taxes in the world. Skimpy history, maybe the author doesn't remember 10% or 8% or VAT being lumped on "hydrocarbons" by that bone headed labour chancellor Healey, he with the eyebrows.

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Ivor Windybottom
By Ivor Windybottom
03rd Apr 2023 10:07

There is some hope that, in future, VAT will become a reverse charge matter across its length, with only the final transaction with the end consumer resulting in a payment to HMRC.

This change is likely to be sought due to the level of fraud in the supply chain.

Hopefully this will cut out the cashflow issues, with only partially exempt businesses having payments due to HMRC on B2B transactions. Postponed VAT accounting for imports shows how crazy the current system is when VAT is passing between two businesses or HMRC, but with no net benefit to HM Treasury.

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