A levy on most sales has been in place in Bri­tain for al­most 45 years

The National - News - - NEWS - NOOR NANJI

“VAT is a sim­ple tax,” said An­thony Bar­ber, Bri­tain’s then chan­cel­lor, about its in­tro­duc­tion in the UK on April 1, 1973.

Forty-four years ago, that was prob­a­bly true. VAT in the UK started off as a straight­for­ward 10 per cent levy that was charged on most goods bought from a busi­ness.

How­ever, the tax has since swollen in size and com­plex­ity, with dif­fer­ent rates and a range of ex­emp­tions.

Brexit adds another layer of com­pli­ca­tion as VAT is a Euro­pean Union leg­is­lated tax, so there are ex­pected to be big changes to it once the UK leaves the bloc.

In­deed, a main rea­son why Bri­tain in­tro­duced the tax was that it was a con­di­tion of join­ing the Euro­pean Eco­nomic Com­mu­nity.

The UK’s tax of­fice – Her Majesty’s Rev­enue and Cus­toms – de­fines VAT as “a tax that’s charged on most goods and ser­vices that VAT-reg­is­tered busi­nesses pro­vide in the UK”.

There are three rates of VAT: the stan­dard 20 per cent; a re­duced rate of 5 per cent that ap­plies to items such as chil­dren’s care seats, and zero rate (ap­plied to ba­sic food, books, news­pa­pers, young chil­dren’s cloth­ing and most pub­lic trans­port).

There are also ex­empted items, in­clud­ing lot­tery tick­ets and stamps.

The dif­fer­ent rates have baf­fled con­sumers for years. For ex­am­ple, VAT is charged at 20 per cent on gin­ger­bread men with cho­co­late trousers, but if the gin­ger­bread man is dec­o­rated with “no more than a cou­ple of dots for the eyes”, it is ex­empt.

Quirks like these can cost shop­pers dear, and mean busi­nesses spend much of their time nav­i­gat­ing an in­con­sis­tent list of ex­emp­tions.

Faced with mount­ing pres­sure to sim­plify the sys­tem, chan­cel­lor Philip Ham­mond or­dered a year-long in­ves­ti­ga­tion into the UK’s VAT rules.

The of­fice of tax sim­pli­fi­ca­tion pro­duced its ini­tial re­port in No­vem­ber, which called for “a com­pre­hen­sive re­view” of VAT.

The re­port stated that what was in­tended to be a sim­ple tax had be­come “highly com­plex” and “has not kept pace with changes in so­ci­ety”.

But the work to sim­plify the sys­tem is still con­tin­u­ing, and that means for now, British con­sumers still need to tell their Jaffa cakes (not taxed) from their cho­co­late-cov­ered bis­cuits (taxed at 20 per cent).

The re­port was also in­tended to kick-start a de­bate about the reg­is­tra­tion thresh­old. Busi­nesses in the UK must reg­is­ter for VAT if their tax­able turnover goes over the £85,000 thresh­old.

While that en­ables many small busi­nesses to stay out of the sys­tem, it also has the neg­a­tive ef­fect of dis­cour­ag­ing many grow­ing com­pa­nies from ex­pand­ing be­yond this point.

There had been fears that Mr Ham­mond would re­duce the VAT turnover thresh­old in his Au­tumn Bud­get, forc­ing more busi­nesses to start charg­ing and ad­min­is­ter­ing the tax.

But he re­frained from do­ing so, promis­ing to keep it at £85,000 “for the next two years”.

Mike Cherry, na­tional chair­man of the Fed­er­a­tion of Small Busi­nesses, said that the de­ci­sion was “a great re­lief to the mil­lion or more en­trepreneurs who could have been dragged into this part of the tax sys­tem, and all the ex­tra bu­reau­cracy that goes with it”.

Mr Cherry wel­comed the ini­tial find­ings of the of­fice’s re­port, but said that more needed to be done to stream­line the VAT sys­tem.

“Many small busi­nesses find

the VAT sys­tem very com­plex and time con­sum­ing,” he said.

“A re­cent sur­vey of our mem­bers found that a VAT-pay­ing small busi­ness owner spends an av­er­age of six days a year work­ing on the ad­min­is­tra­tion re­quired for their tax doc­u­men­ta­tion. This is time which could be much bet­ter spent grow­ing their busi­ness.”

The re­port says Brexit presents an op­por­tu­nity to “clar­ify and sim­plify” ar­eas of VAT.

What Brexit is un­likely to do, how­ever, is re­sult in the tax be­ing abol­ished.

VAT is the sec­ond-largest source of tax rev­enue in Bri­tain, af­ter in­come tax. About £124 bil­lion of VAT was col­lected in the 2016-2017 tax year, rep­re­sent­ing 22 per cent of all taxes re­ceived.

That is a rev­enue stream that the gov­ern­ment won’t be bid­ding farewell to any­time soon.

VAT also gen­er­ates far more rev­enue for the British gov­ern­ment than any other form of in­di­rect tax­a­tion. For in­stance, the com­bined rev­enue from var­i­ous “sin taxes”, such as al­co­hol and to­bacco du­ties, came to just £20bn in the same pe­riod.

VAT is also gen­er­ally more broad-based than other forms of in­di­rect tax­a­tion, and in­volves a trail of in­voices that

in the­ory helps to im­prove tax com­pli­ance and en­force­ment.

But anti-tax lob­by­ists ar­gue that VAT is “re­gres­sive”, as it hits the poor­est fam­i­lies hard­est. Every­one pays the same tax rate for the same items, with no con­sid­er­a­tion of one’s abil­ity to pay.

Re­search has con­sis­tently proven that the less well-off pay a higher share of their in­come in VAT than the rich.

The so-called “tam­pon tax” adds another layer of con­tro­versy. The levy means women’s san­i­tary prod­ucts are sub­ject to 5 per cent VAT, de­spite be­ing viewed by many as a ba­sic ne­ces­sity.

The is­sue even be­came em­broiled with Brexit, as some Euroscep­tics rec­om­mended women vote Leave in the EU ref­er­en­dum or­der to es­cape the tam­pon tax.

Fi­nally, the Con­ser­va­tive gov­ern­ment pledged to abol­ish

the tam­pon tax, with the leg­is­la­tion to elim­i­nate it ex­pected to come into ef­fect in April next year.

Most re­cently, VAT was back in the spot­light when British MPs ac­cused on­line giants such as Ama­zon and eBay of prof­it­ing from VAT eva­sion.

Ac­cord­ing to the UK’s Na­tional Au­dit Of­fice, the gov­ern­ment lost up to £1.5bn last year from VAT eva­sion by over­seas on­line re­tail­ers.

HMRC also has been heav­ily crit­i­cised over its poor record against on­line sell­ers breach­ing VAT rules.

Mr Cherry said: “Re­cently con­cerns have been raised about VAT eva­sion by traders out­side of the EU sell­ing items into the UK via on­line mar­ket places.

“No busi­ness, wher­ever it is in the world, should be able to gain com­pet­i­tive ad­van­tage by dodg­ing UK taxes.”

Pho­tos Chris Whi­teoak / The Na­tional

Nabil Nasser says smart shop­pers will not be pan­icked by the in­tro­duc­tion of VAT to­mor­row


Lena Jeger, a Labour MP, chats with pro­test­ers against VAT on char­i­ties, out­side West­min­ster in 1972

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