VAT is 40 years old – and now has middle-age spread
Levy has raised around £1.6tn but has become a headache for business with hopes for a cheap and simple EU tax in the past .
Jaffa Cakes … cake or biscuit? The tribunal decided they were indeed cakes, and could therefore be zero-rated. Photograph: Martin Lee/Rex Features
Pink Floyd had just released The Dark Side of the Moon and the doors of the London Stock Exchange were finally open to female members when Conservative chancellor Anthony Barber introduced the nation to value added tax.
Imposed as a condition of Britain’s joining the common market, VAT is 40 years old on Monday and it has so far raised £1.6tn for the public purse, according to a study by the accountancy company Deloitte.
Designed by French tax expert Maurice Lauré in the postwar years and first levied in the UK on April Fools’ Day 1973, VAT is now the government’s third largest source of revenue after income tax and national insurance.
But what started out as a simple, easy to collect tax – a low, flat rate imposed on most goods and services – has become increasingly complex, with exemptions for everything from children’s clothes to Jaffa Cakes.
“The initial idealistic hope that it would be a simple tax, easy to apply, has constantly been eroded because there are always special lobbies,” said Deloitte tax expert Daniel Lyons. “Politics and economics got in the way of simplicity.”
Today, many of life’s essentials are not liable for VAT, including water, eggs, fish, milk, butter, cheese, newspapers, books, nuts, prescription medicines, cold sandwiches, tea, coffee, cooking oil and cereals. Other goods and services including zoos, burials, antiques and TV licences are simply exempt.
VAT was a European replacement for the purchase tax, which was charged at different rates according to the luxuriousness of an item. The new levy, a flat 10% on most goods and services, was in theory simpler to administer.
Paid by the buyer but collected by the seller, it is still one of the cheapest taxes for HM Revenue & Customs to administer because it requires businesses to act as tax collector.
It even had its own, user-friendly tribunal, where business owners could represent themselves when pleading their case.
But just one year in, Labour chancellor Denis Healey began to muddy the waters. He reduced the standard rate to 8%, but introduced a higher rate of 12.5% for petrol and some luxury goods, doubling the upper rate later that year to 25% before lowering it in 1976.
In 1979, the higher rate was abolished and the standard rate increased to 15%, where it remained until Conservative chancellor Norman Lamont increased it to 17.5% in 1991. Lamont also imposed an 8% rate on domestic fuel and power, which had previously been zero-rated.
The 1997 general election swept Labour to power and with it came a new series of tweaks and exemptions. Gordon Brown brought domestic fuel and power down to 5%, and knocked money off the rate for home insulation materials. He applied his own moral stamp, with VAT reductions on nicotine gum and other stop-smoking products, along with contraceptives, tampons and children’s car seats.
The recent banking crisis brought further changes, when Labour chancellor Alistair Darling cut the rate to 15% from December 2008 in an attempt to boost consumer spending. The discount was short-lived; a year later the rate was returned to 17.5%.
On 4 January 2011, the current chancellor, George Osborne introduced a 20% rate – a centrepiece of the coalition’s austerity drive – meaning in 40 years the tax rate on goods and services sold in the UK has doubled.
VAT appeals have become expensive and complex, too. Bringing a case can cost £100,000, says Lyons at Deloitte, with most businesses choosing to hire accountants, lawyers and senior barristers instead of representing themselves.