Despite its almost four decades of history in the UK, the Value Added Tax or VAT is still seen by many people as complex and difficult to understand. In fact the principle of the tax is simple: it’s a tax on the difference in value between good or raw materials entering the hands of one party and the value of the same articles when they’re next passed on. If I’m a bookseller and I buy a book from a publisher for, say, £6 and sell it to the public for £10, the VAT is paid on the £4 difference, the value which has been added to the article while it’s in my possession.
The tax, like similar taxes worldwide, has always been a favourite for governments who don’t want to be seen increasing taxes on incomes or property or other resources which are seen as personal.
VAT was introduced in 1973 at a standard rate of 10% on all transactions. What could be simpler? So why is it now seen as such a difficult concept to understand?
The problem with VAT in the UK is historical, and historical in the on-going sense. Successive governments have fiddled endlessly with it, lowering and raising it, introducing exemptions and different rates.
In July 1974, the 10% flat rate was lowered to 8 per cent. Later the same year, a new special rate for petrol of 25 per cent was levied. This was then reduced two years later to 12.5 per cent.
Margaret Thatcher was the next to adjust VAT, scrapping the higher rate in 1979 and introducing a single rate of 15 per cent. In 1991 that rate was raised to 17.5 per cent and in 1994 a new low rate of 8 per cent was introduced for heating fuel and power. In 1997 that rate was reduced still further to 5 per cent.
Those rates were the longest lived in the history of VAT, remaining stable until the higher rate was reduced to 15 per cent in 2009. The respite was only brief, however, with the 17.5 rate returning the following year and then being raised to 20% in 2011.
Exemptions to the tax have also been a yo-yo affair. Current exemptions cover most food, medicines, books and some transport.
A number of exemptions which formerly existed have been done away with when government needed a quick fix for a budget deficit. Some of those include takeaway food and other snacks and home improvements.
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In effect, VAT is a consumption tax. It is calculated by summing the costs of producing and distributing goods or services less the cost of acquiring raw materials and other inputs to production.
The historical differences between tax rates have generally reflected goods and services which the government deems either essential or luxury. The need to define categories of goods taxed at different rates or not taxed at all has also led to absurd categorisations such as that applying to nuts. Shelled nuts are deemed a snack and thus taxed at the higher rate. A peanut in the shell, however is a food (the criterion being that the consumer must prepare it by removing it from the shell) and thus not subject to tax at all.