Happy birthday to VAT, the tax that everyone loves (to hate)! Saturday 1 April marks the 50th anniversary of the introduction of value added tax in the UK. Since then, it has become a major source of government revenue, raising £157.5bn in 2021-22. How did VAT come about and what does it mean for consumers and businesses today?
VAT is a type of consumption tax, levied on the value added to goods and services at each stage of production and distribution. The standard rate of VAT in the UK is currently 20%, but there are reduced rates (5% or 0%) for certain items including some food, books and children's clothing.
VAT’s origins can be traced back to France in the 1950s, where it was devised to avoid double taxation and promote economic efficiency. It was adopted by the then European Economic Community (EEC) in 1967 as a common system of taxation for its member states. The tax was implemented in the UK in 1973 as part of the country's entry into the EEC.
Over the years, VAT has undergone numerous changes and reforms, reflecting the evolving economic and social conditions of the UK. In 2008, VAT was used as an economic tool by the Labour government when the standard rate was temporarily reduced to stimulate demand in the economy.
Now, VAT faces new challenges and opportunities. The UK's departure from the EU means that it has more autonomy over its VAT policy and can freely set its own rates and rules. A high-profile example of this was when women’s sanitary products became zero-rated upon leaving the EU on 1 January 2021. They were previously subject to the reduced rate (5%).
VAT must also adapt to the changing patterns of consumption and production in the digital age, such as online shopping, e-commerce platforms and digital services. The EU is currently consulting on proposed changes to VAT to ensure it is ready for these changes. The UK government is sure to monitor what is happening in the EU before making its own proposals in this area.
Some experts have suggested that VAT should be reformed to make it simpler, fairer, and more efficient; for example, by removing exemptions and additional rates of VAT. Whatever the future holds for VAT, one thing is certain: it will continue to be a vital contributor to the UK's public finances, and a topic of debate and controversy for politicians, businesses and consumers alike.
So, let's raise a glass (with 20% VAT included) and toast to VAT's golden jubilee.
VAT at 50 – where next?
ICAEW’s Tax Faculty hosted a conference on 22 May to mark the 50th anniversary of the introduction of VAT in the UK. The conference briefly reflected on VAT’s evolution since 1973 but focused predominantly on exploring the future of the tax over the next five to ten years.
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