VAT is levied on most goods and services provided by registered businesses in the UK and some goods and services imported from outside the UK.[2] The default VAT rate is the standard rate, 20% since 4 January 2011. Some goods and services are subject to VAT at a reduced rate of 5% (such as domestic fuel) or 0% (such as most food and children's clothing).[3] Others are exempt from VAT or outside the system altogether.
VAT is an indirect tax because the tax is paid to the government by the seller (the business) rather than the person who ultimately bears the economic burden of the tax (the consumer).[4] Opponents of VAT claim it is a regressive tax because the poorest people spend a higher proportion of their disposable income on VAT than the richest people.[5] Those in favour of VAT claim it is progressive as consumers who spend more pay more VAT.[4]
History
Between October 1940 and March 1973 the UK had a consumption tax called Purchase Tax, which was levied at different rates depending on an assessment of goods' luxuriousness.[4] Purchase Tax was applied to the wholesale price, introduced during World War II, initially at a rate of 33.3%. This was doubled in April 1942 to 66.6%, and further increased in April 1943 to a rate of 100%, before reverting in April 1946 to 33.3%. Unlike VAT, Purchase Tax was applied at the point of manufacture and distribution, not at the point of sale. The rates of Purchase Tax for various classes of goods at the start of 1973, when it gave way to VAT, were 13%, 22%, 36% and 55%.{[6]
In July 1974, Labour Chancellor Denis Healey reduced the standard rate of VAT from 10% to 8% but introduced a new higher rate of 12.5% for petrol and some luxury goods.[4][7][9] In November 1974, Healey doubled the higher rate of VAT to 25%.[7] Healey reduced the higher rate to 12.5% in April 1976.[7][9][10]
Under Margaret Thatcher's leadership, Conservative Chancellor Geoffrey Howe increased the standard rate of VAT from 8% to 15% and abolished the higher rate in June 1979.[4][7][11] The rate remained unchanged until 1991, when Conservative Chancellor Norman Lamont increased it from 15% to 17.5%.[4][7][11] The additional revenue was used to pay for a reduction in the hugely unpopular community charge (the "poll tax").[11] During the 1992 general election the Conservatives promised not to extend the scope of VAT but in March 1993, Lamont announced that domestic fuel and power, which had previously been zero-rated, would have VAT levied at 8% from April 1994 and the full 17.5% from April 1995.[8][12] The planned introduction of VAT on domestic fuel and power went ahead in April 1994, but the increase from 8% to 17.5% in April 1995 was scuppered in December 1994, after the government lost the vote in parliament.[7][12]
In its 1997 general election manifesto, the Labour Party pledged to reduce VAT on domestic fuel and power to 5%.[13] After gaining power, the new Labour Chancellor Gordon Brown announced in July 1997 that the lower rate of VAT on domestic fuel and power would be reduced from 8% to 5% with effect from 1 September 1997.[14][15] In November 1997, Brown announced that the VAT on installation of energy-saving materials would be reduced from 17.5% to 5% from 1 July 1998. Brown subsequently reduced VAT from 17.5% to 5% on sanitary protection products (from 1 January 2001); children's car seats (from 1 April 2001); conversion and renovation of certain residential properties (from 12 May 2001); contraceptives (from 1 July 2006); and smoking cessation products (from 1 July 2007).
In response to the late-2000s recession, Labour Chancellor Alistair Darling announced in November 2008 that the standard rate of VAT would be reduced from 17.5% to 15% with effect from 1 December 2008.[16][17] However, in December 2009, Darling announced that the standard rate of VAT would return to 17.5% with effect from 1 January 2010.[18][19]
In the run up to the 2010 general election there were reports that the Conservatives would raise VAT if they gained power.[20][21] The party denied plans for such an increase, but refused to rule one out for the 2010 budget.[22][23] Following the election in May 2010, the Conservatives formed a coalition government with the Liberal Democrats. In the 2010 budget, described by PM David Cameron as an "emergency budget", Chancellor George Osborne announced that the standard rate of VAT would increase from 17.5% to 20% with effect from 4 January 2011.[24][25]
Before the 2015 general election Labour claimed that the Conservatives would raise VAT to 22.5% if they were re-elected and Osborne reputedly refused to deny the claim.[26] On 25 March 2015 Cameron pledged in the House of Commons that VAT would not be increased.[27][28]
In the March 2020 budget the government announced that it would move women's sanitary products into the zero-rated group, as pledged in the 2016 budget, from 1 January 2021, the first date possible after EU VAT law ceased to apply to the UK.[30][31]
From 1 March 2021, a domestic VAT reverse charge must be used for most supplies of building, construction and demolition services, meaning that it is the responsibility of the customer, rather than the supplier, to account to HMRC for VAT on the supply of construction services.[32] The reverse charge will not apply where the customer is the end user of the building. The Value Added Tax Regulations 1995 states that invoices for services subject to the reverse charge must include the reference "reverse charge".[33]
Operation
All businesses that provide "taxable" goods and services and whose taxable turnover exceeds the threshold must register for VAT.[2] The threshold as of 2022 is £85,000,[34] by far the highest VAT registration threshold in the world.[4] Businesses may choose to register even if their turnover is less than that amount. All registered businesses must charge VAT on the full sale price of the goods or services that they provide unless exempted or outside the VAT system. The default VAT rate is the standard rate, currently 20%.[2] Some goods and services are charged lower rates (reduced or zero).
Registered businesses must pay over to HMRC the VAT they have charged on their goods or service (known as output tax) but they may offset this with the VAT they have incurred on goods or services they have purchased that relates to their own onward 'taxable' supplies (known as input tax).[35] VAT incurred by businesses that does not relate to their onward making of taxable supplies (whether exempt or from 'non-business' activities) may not be offset from the amount of VAT that is payable to HMRC.
A separate scheme called The Flat Rate Scheme is also run by HMRC. This scheme allows a VAT registered business with a turnover of less than £150,000 (excluding VAT) per annum to pay a fixed percentage of its turnover to HMRC every 3 months.[36] The scheme is designed to reduce red tape for small business and allow new companies to keep some of the VAT they charge to their customers.[37]
Businesses selling exempt goods, supplies or services, such as banks, may not register for VAT or reclaim VAT that they have incurred on purchases.[2] Businesses that sell a mixture of taxable and exempt goods or services can only recover the proportion of the VAT they incur on their purchases that relates to their onward taxable supplies. The rules dealing with 'mixed use' (or 'residual') VAT on purchases are complex. However, businesses that sell zero-rated goods or supplies, such as food producers or booksellers, may reclaim all the VAT they have incurred on purchases.
Rates
There are currently three rates of VAT:[38] standard (20%),[39] reduced (5%) and zero (0%).[2] In addition some goods and services are exempt from VAT or outside the VAT system.[2]
The following are the rates applicable to some common goods and services:[40]
Food & drinks supplied for consumption on the premises (at restaurants, cafes etc) (reduced rate during COVID-19 pandemic of 5% from 15 July 2020 to 30 September 2021 and then of 12.5% from 1 October 2021 to 30 March 2022)
Hot take-away food & drinks (inc. burgers, hot dogs, toasted sandwiches) (reduced rate during COVID-19 pandemic of 5% from 15 July 2020 to 30 September 2021 and then of 12.5% from 1 October 2021 to 30 March 2022)
Ice cream
Fruit juice & other cold drinks (not milk)
Nuts (shelled, roasted/salted)
Postal services (Royal Mail/other licensed operators)
Potato crisps
Prams & pushchairs
Road fuel (petrol/diesel)
Salt (non-culinary)
Stationery
Taxi fares
Tolls for bridges, tunnels & roads (privately operated)
The UK government loses billions in revenue each year due to VAT avoidance, evasion and fraud. In 2006 the loss was estimated to be between £13bn and £18bn, equivalent to £1 for every £6 of VAT due.[44] The bulk of the lost revenue, about £1 in every £8 of VAT due, is due to evasion.[45] Evasion, which is illegal, occurs when registered businesses pay over to HMRC less than they should. This can be done by understating sales or overstating purchases. Evasion also occurs when businesses do not charge VAT on goods and services they provide even though they are legally obliged to. Cash-in-hand jobs by tradespeople may indicate VAT evasion.[46]
In recent years carousel fraud (also known as missing trader fraud) has increased. Criminal gangs trade goods, such as mobile phones, across EU countries.[47] They do not have to pay VAT, as imports from the EU are not subject to VAT in the UK. The fraud occurs when the criminals sell the goods with VAT in the UK but fail to pass the VAT to HMRC.[47] The goods are often repeatedly shipped around EU countries by criminal gang networks, hence the "carousel" name.[48] According to the HMRC, between £1.1bn and £1.9bn tax revenue was lost in 2004/05 due to carousel fraud.[48] The European Union Emission Trading Scheme has been plagued by carousel fraud.[49][50]
Until 2012, the Low Value Consignment Relief (LVCR) meant that goods imported from outside the EU through Jersey and costing less than a set amount were not subject to VAT.[51] When the LVCR was introduced in 1983 it was set at about £5 but gradually rose to £18.[52] From 1 November 2011 the LVCR was reduced from £18 to £15.[52] The LVCR allowed online retailers of DVDs and CDs to avoid VAT by importing the goods from the Channel Islands, which are not part of the EU. Major retailers involved in this tax avoidance included Amazon, Asda, HMV, Play.com, Tesco, W H Smith and Woolworths.[53] The tax avoided each year due to LVCR was estimated to be £85m in 2005, £110m in 2008, £130m in 2010 and £140m in 2011.[51][52] From 1 April 2012 the relief was withdrawn in respect of goods imported to the UK from the Channel Islands.[54]
Criticism
Opponents of VAT claim that it is regressive and is paid by all consumers whether they are rich or poor, young or old.[8] The poorest also spend a higher proportion of their disposable income on VAT than richest.[5] The Office for National Statistics report showed that in 2009/10 the poorest 20% spent 8.7% of their gross income on VAT, whereas the richest 20% spent only 4.0% of their gross income on VAT.[55] Similarly, the poorest 20% spent 9.7% of their disposable income on VAT, whereas the richest 20% spent only 5.2% of their disposable income on VAT.[55] Supporters of VAT claim VAT is progressive as consumers who spend more pay more VAT.[4] However, according to the definition, VAT is neither progressive nor regressive, since the rate neither increases or decreases with the taxable amount.[56][57][58]
The zero rating of food, and the permission for businesses to reclaim input VAT, have been said to mean that the government in effect subsidises the food industry.[4] Critics also argue that VAT is double taxation as consumers pay for goods and services using income that has already been taxed,[4] or that it helps to subsidise automation by not removing worker's wages from the equation. It is also argued that VAT is an inefficient tax owing to the numerous exemptions and concessions.[8]
Benefits of VAT are considered to lie on the state-side.[clarification needed] VAT is considered to be a more stable source of income than tax on profits, since the profits are geared, and thus fall at a much faster rate than turnover in economic slowdowns or may drop with an ageing population.[59] VAT, therefore is considered to stabilise treasuries in countries with weak economies.[59] At the same time, as a consumption tax, VAT is considered to be more growth-friendly than income- or profit-taxation.[59]
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer by a governmental organization in order to collectively fund government spending, public expenditures, or as a way to regulate and reduce negative externalities. Tax compliance refers to policy actions and individual behaviour aimed at ensuring that taxpayers are paying the right amount of tax at the right time and securing the correct tax allowances and tax relief. The first known taxation took place in Ancient Egypt around 3000–2800 BC. Taxes consist of direct or indirect taxes and may be paid in money or as its labor equivalent.
HM Revenue and Customs is a non-ministerial department of the UK Government responsible for the collection of taxes, the payment of some forms of state support, the administration of other regulatory regimes including the national minimum wage and the issuance of national insurance numbers. HMRC was formed by the merger of the Inland Revenue and HM Customs and Excise, which took effect on 18 April 2005. The department's logo is the St Edward's Crown enclosed within a circle.
In the United Kingdom, taxation may involve payments to at least three different levels of government: central government, devolved governments and local government. Central government revenues come primarily from income tax, National Insurance contributions, value added tax, corporation tax and fuel duty. Local government revenues come primarily from grants from central government funds, business rates in England, Council Tax and increasingly from fees and charges such as those for on-street parking. In the fiscal year 2014–15, total government revenue was forecast to be £648 billion, or 37.7 per cent of GDP, with net taxes and National Insurance contributions standing at £606 billion.
An ad valorem tax is a tax whose amount is based on the value of a transaction or of a property. It is typically imposed at the time of a transaction, as in the case of a sales tax or value-added tax (VAT). An ad valorem tax may also be imposed annually, as in the case of a real or personal property tax, or in connection with another significant event. In some countries, a stamp duty is imposed as an ad valorem tax.
Stamp duty in the United Kingdom is a form of tax charged on legal instruments, and historically required a physical stamp to be attached to or impressed upon the document in question. The more modern versions of the tax no longer require a physical stamp.
Tax evasion is an illegal attempt to defeat the imposition of taxes by individuals, corporations, trusts, and others. Tax evasion often entails the deliberate misrepresentation of the taxpayer's affairs to the tax authorities to reduce the taxpayer's tax liability, and it includes dishonest tax reporting, declaring less income, profits or gains than the amounts actually earned, overstating deductions, using bribes against authorities in countries with high corruption rates and hiding money in secret locations.
Hydrocarbon Oil Duty is a fuel tax levied on some fuels used by most road motor vehicles in the United Kingdom; with exceptions for local bus services, some farm and construction vehicles and aviation, which pay reduced or no fuel duty.
Missing trader fraud involves the theft of Value Added Tax (VAT) from a government by fraudsters who exploit VAT rules, most commonly the European Union VAT rules which provide that the movement of goods between member states is VAT-free. There are different variations of the fraud but they generally involve a trader charging VAT on the sale of goods and absconding with the VAT. The term "missing trader" is used because the fraudster has gone missing with the VAT.
Motoring taxation in the United Kingdom consists primarily of vehicle excise duty, which is levied on vehicles registered in the UK, and hydrocarbon oil duty, which is levied on the fuel used by motor vehicles. VED and fuel tax raised approximately £32 billion in 2009, a further £4 billion was raised from the value added tax on fuel purchases. Motoring-related taxes for fiscal year 2011/12, including fuel duties and VED, are estimated to amount to more than £38 billion, representing almost 7% of total UK taxation.
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The starting rate of income tax, known as the 10p rate, was a special rate of personal income taxation in the United Kingdom that existed from 1999 to 2008.
The European Union value-added tax is a value added tax on goods and services within the European Union (EU). The EU's institutions do not collect the tax, but EU member states are each required to adopt in national legislation a value added tax that complies with the EU VAT code. Different rates of VAT apply in different EU member states, ranging from 17% in Luxembourg to 27% in Hungary. The total VAT collected by member states is used as part of the calculation to determine what each state contributes to the EU's budget.
The Goods and Services Tax (GST) is an abolished value-added tax in Malaysia. GST is levied on most transactions in the production process, but is refunded with exception of Blocked Input Tax, to all parties in the chain of production other than the final consumer.
The June 2010 United Kingdom Budget, officially also known as Responsibility, freedom, fairness: a five-year plan to re-build the economy, was delivered by George Osborne, Chancellor of the Exchequer, to the House of Commons in his budget speech that commenced at 12.33pm on Tuesday, 22 June 2010. It was the first budget of the Conservative-Liberal Democrat coalition formed after the general election of May 2010. The government dubbed it an "emergency budget", and stated that its purpose was to reduce the national debt accumulated under the Labour government.
Taxation in Norway is levied by the central government, the county municipality and the municipality. In 2012 the total tax revenue was 42.2% of the gross domestic product (GDP). Many direct and indirect taxes exist. The most important taxes – in terms of revenue – are VAT, income tax in the petroleum sector, employers' social security contributions and tax on "ordinary income" for persons. Most direct taxes are collected by the Norwegian Tax Administration and most indirect taxes are collected by the Norwegian Customs and Excise Authorities.
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A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution, or sale to the end consumer. If the ultimate consumer is a business that collects and pays to the government VAT on its products or services, it can reclaim the tax paid. It is similar to, and is often compared with, a sales tax. VAT is an indirect tax because the person who ultimately bears the burden of the tax is not necessarily the same person as the one who pays the tax to the tax authorities.
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The November 1993 United Kingdom budget was delivered by Kenneth Clarke, the Chancellor of the Exchequer, to the House of Commons on 30 November 1993. It was the second budget to be presented in 1993, and the first to be presented by Clarke following his appointment as Chancellor by Prime Minister John Major earlier that year. The November 1993 budget was also the first in the modern era to be held in the autumn, the government having decided to move the date of the budget so it could outline its tax and spending plans at the same time.
1 2 Andrew Barnard, Steve Howell and Robert Smith (2011). Effects of taxes and benefits on household income Statistical Bulletin - 2009/2010. Office for National Statistics. p.14.
↑ Webster (4b): increasing in rate as the base increases (a progressive tax)
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