VALUE ADDED TAX

In simple words, value added Tax (VAT) is a consumption tax. VAT is regulated and collected by Her Majesty’s Revenues and Customs (HMRC) under statutory powers granted by Value Added Tax Act 1994.Formally introduced by Marice Lauré, Joint Director of the France Authority on 10th April 1954, the idea dates back to 1918 to Germany’s Dr Wilhelm von Siemens. In UK, it has been levied since 1973 and accounts for third largest revenue source for the government.

 

Year VAT (£bn)  % Year VAT (£bn)  % Year VAT (£bn)  % Year VAT (£bn)  %
1978/79 4.9 7.02% 1988/89 27.2 13.81% 1998/99 52.3 15.60% 2008/091 78.4 14.77%
1979/80 8.0 9.41% 1989/90 29.6 14.02% 1999/00 56.4 15.73% 2009/101 63.7 12.84%
1980/81 11.1 11.00% 1990/91 30.9 13.94% 2000/01 58.5 15.30% 2010/111 73.4 13.89%
1981/82 11.9 9.95% 1991/92 35.3 15.25% 2001/02 61.0 15.66% 2011/121 79.5 13.79%
1982/83 13.8 10.63% 1992/93 37.2 16.36% 2002/03 63.5 16.03% 2012/131 83.8 13.52%
1983/84 15.3 11.09% 1993/94 39.2 16.67% 2003/04 69.1 16.36% 2013/141 87.7 13.26%
1984/85 18.6 12.59% 1994/95 41.7 16.30% 2004/05 73.0 16.11%      
1985/86 19.4 12.29% 1995/96 43.1 15.58% 2005/06 72.9 14.98%      
1986/87 21.3 12.94% 1996/97 46.6 16.14% 2006/07 77.4 14.89%      
1987/88 24.2 13.53% 1997/98 50.6 16.00% 2007/08 80.6 14.71%      

1= Estimated

 

At the same time UK government loses billions of revenues due to frauds and avoidance and in recent times the HRMC has tightened measured to ensure compliance and adopted strict punishments for non compliance.

VAT is a form of indirect tax. Its ultimate burden is on the consumer of goods and services but is collected by the seller of such goods and services who pays the tax amount to the government. Opponents have claimed it to be regressive in nature as poor spend higher proportion of their incomes on VAT where as proponents claim it to be progressive as rich spend more and hence pay more. The rates have varied in the course of time. The following chart shows historic rates of VAT in UK.

 

From To Standard rate
18/06/1979 18/03/1991 15%
19/03/1991 30/11/2008 17.5%
01/12/2008 31/12/2009 15%
01/01/2010 03/01/2011 17.5%
04/01/2011   20%

 

There are certain items such as children car seat and gas and electricity that have lower VAT of 5%.  Some items do not have VAT applied on them sach as:

  1. basic staple food excluding restaurant meals and take aways
  2. books magazines and newspaper
  3. clothes and shoes for children
  4. Pads, tampons and other sanitary protection products
  5. Public transport
  6. Certain products can be VAT exempted on medical grounds such as wigs worn for hair loss due to chemotherapy.

There have been litigations in courts based on the above list; whether some items are classified in one of the above categories or not. The famous case of Jaffa Cake is one such example. The manufacturers of Jafa Cake went in court with the argument that their product is a cake not a biscuit because they go hard when stale like cake. They successfully got VAT exemption because cakes are classified as staple food.

 

VAT has been so far the most complicated area of UK’s tax law regime with most number of litigations and disputes with HRMC. Due to such complexities, businesses even sole traders have started to hire professional accountants to avoid issues.

http://certaxlondon.co.uk provides bookkeeping and accounting services.

 

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