Value Added Tax (VAT) turned 50 on 1 April 2023. However, many would argue that it still has some growing up to do!
Whilst many of us will know something of the biscuit vs. cake debate, this doesn’t even scratch the surface in respect of VAT’s nuances and complexities.
In this blog, we take a brief look at the history of VAT, VAT at 50, and what the future of this highly contested tax could look like.
A brief history of Value Added Tax (VAT)
VAT has been adopted by more than 170 countries worldwide, with many European countries enacting it during the 1960s and 1970s.
For some years before it came to the UK, we operated a similar levy known as the ‘Purchase Tax’, which was introduced in 1940.
Purchase Tax was charged on the wholesale price of goods, at the point of manufacture and distribution rather than the point of sale. The rate was dependent on how luxury the goods were deemed to be.
Purchase Tax was introduced at 33.33%, then doubled in 1942. It then increased to 100% in 1943, before falling back to 33.33% in 1946.
In January 1973, the UK joined the European Economic Community (now the EU). In April of the same year, Purchase Tax met its demise.
VAT took effect 50 years ago on 1 April 1973, with Conservative Chancellor Lord Barber describing it as a ‘simple tax’. He set a single rate of VAT at 10% on most goods and services.
In the decades since, there have been lower rates, reduced rates for certain products and industries, and the introduction of a domestic VAT reverse charge. The highest rate for VAT was 25% between 1975 and 1976 on luxury items.
Yet, despite incremental change, the regime still doesn’t quite seem to lend itself to doing business in the 21st century.
The rules are more complex than ever, and interpretation can vary wildly. As a result, confident application of the rules can be a challenge for many business owners.
VAT at 50: The tax we love to hate
An ‘indirect’ tax, VAT is levied on taxable goods and services provided to consumers by VAT-registered businesses in the UK.
Whilst HMRC collect the tax from the seller, it is ultimately the consumers economic burden. This is because the VAT element of any product is usually already included in the purchase price.
The UK operates the highest VAT registration threshold in the world; currently, £85,000.
Businesses with turnover exceeding £85,000 must register for and levy VAT on the full sale price of any goods or services that they provide*.
*This does not include goods or services that are exempt, or outside the scope of VAT.
Business owners must submit an MTD-compliant VAT return every three months. A VAT return tells HM Revenue & Customs (HMRC) how much VAT you have paid/charged in a period.
If you have charged more VAT than you have paid, you will owe HMRC the difference. Where the opposite is true, you will be due a repayment from HMRC.
As for the current rates of VAT, there are three – standard (20%), reduced (5%) and zero-rated (0%). Worth noting is that exempt goods and services and zero-rated goods and services are not the same.
There are also a handful of VAT schemes – including the Flat Rate Scheme – which are designed to make it simpler for some VAT-registered businesses to calculate and account for VAT to HMRC.
Will VAT ever be ‘simple’?
The number of tribunal cases still being heard indicates that VAT is still not clear cut. Some of the problems concern the 1973 definition of zero rating. For example, printed books are zero-rated but digital books are not. There is no logic for this, just that when the rules were set in 1973 digital books did not exist. Probably the most bizarre example is that the sale of honey bees is zero-rated, but the sale of bumblebees is standard rated; the reason being that honey bees are part of the food chain! Furthermore, a chocolate teacake is zero-rated but its ingredients – chocolate, marshmallow, and biscuit, – are all standard rated items.
The tax could become simpler if a major review of zero-rated and exempt items were carried out. What is needed, is for the Government to respond to tribunal cases, not by trying to preserve the tax base, but by identifying the reason for the tribunal hearing in the first place. There are also strong arguments for reducing the VAT threshold significantly to, say, £10,000 so that every genuine business will need to register, creating a more level playing field. In reality, VAT still will need to be understood by business owners for the considerable future.
VAT advice and support for businesses
We understand that taking care of your VAT affairs, and staying compliant, isn’t always easy.
Erroneous claims, inaccuracies in your data, late filings, or failure to register for VAT altogether, can all be costly mistakes.
Our team can help you to implement good record-keeping habits, that are sustainable. In addition, we will ensure that your VAT returns are prepared accurately, and submitted promptly.
Contact us today to discuss your requirements in respect of VAT, or to find out more about the range of business tax matters that we can support you with.
