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How Has VAT Changed Through The Years?

VAT first came into force in 1973, and was introduced by Lord Barber, who was then the chancellor under Sir Edward Heath. It started off as a simple 10% tax on nearly all goods bought from a business. Since 1973, VAT has swollen in size, complexity and popularity.

Considered to be one of the country’s leading VAT specialists, Paddy Behan, a partner at Vantis accountancy firm, said: ‘It is a hugely efficient tax, it's a great tax from a revenue raising exercise. It has swept the world. More than 130 countries have now adopted it from Belgium to Burkina Faso. One of the few holding out is America, but academics are talking about Obama introducing it over there.’

Originally, VAT was a French idea, started in the 1950s. Britain had to introduce it as part of it’s condition of joining the European Economic Community. All countries joining the EEC had to replace their indirect taxes with the VAT. It replaced Purchase Tax, which was a fairly complex system that had many different rates.

VAT started out at a relatively low level of no more than 10%, with the exception of petrol, and briefly, electrical appliances, which were deemed to be luxuries, and were subjected to a 25% rate.

However, Heath’s Government, when in opposition, had always promised that key essential items would not be subject to VAT, such as books.

The EEC took a fairly dim view of this, but allowed some goods, including books, nearly all food, and utility bills to be "zero rated". This was technically a "transition measure" and some experts believe that Brussels could still insist – 35 years after the event – that these zero-rated items carry VAT, as they do in France, where it is levied at 7 per cent on books and 5.5 per cent on food.

Since then, VAT has frequently changed. In Baroness Thatcher’s first term in office, the luxury rate was scrapped and merged into a higher rate of 15%, which was then raised to the more familiar 17.5% in 1991.

In the run-up to the 1992 election, Sir John Mayor promised not to ‘extend the scope of value-added tax’, but he did raise utility bills from zero-rated to a new 8% reduced rate. This would later be reduced to 5% by Gordon Brown.

Did you know: The zero-rating has thrown up endless confusion, as well as profitable work for lawyers and accountants. Snacks, for instance, carry full VAT because they are deemed to be non-essential. But a peanut in a shell is deemed to be a food, because the consumer needs to "prepare" the nut by shelling it. If a manufacturer has done the shelling for you, it is a snack.

Stephen Coleclough, VAT partner at PricewaterhouseCoopers, said: "The regime can't really cope with innovative products such as tortilla chips or smoothies, because the zero-rating rules just follow the guidelines laid out under the Purchase Tax. And we didn't really eat tortilla chips in the 1970s."

The two most famous rows have involved chocolate covered treats: Jaffa Cakes and marshmallow teacakes. HMRC believed that they were both chocolate-covered snacks, but lawyers successfully argued that were both actually cakes - and therefore zero-rated for VAT.

HMRC's relentless monitoring of teatime treats has helped VAT become one of the Treasury's most important taxes. It is scheduled to raise £78 billion this year. Every extra percentage point a chancellor puts on VAT is reckoned to bring in £4.5 billion.

Most European countries's VAT rate is about 20 per cent.

However, many believe its simplicity makes it a very harsh tax, hitting all consumers, young and old, poor and rich.

Mr Coleclough said: "It is seen as a particularly regressive tax. For it to work efficiently it has to be a broad-based tax, which is levied on everything.

"But if it was to be put up to the full amount on food, fuel, children's clothing and the like there would be rioting in the streets."

Though most items poorer income households, especially pensioners, consume are zero or reduced rated, "they will always in the normal course of events purchase standard rated goods," said Mr Behan.

This is an edited version of ‘VAT: A Brief History’ by the Telegraph.

 

Related Resources:

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