VAT Turns 50

HMRC’s most mind-bending tax turns 50

Many Happy Returns, VAT. Yes, it’s true, everyone’s favourite tax celebrated its 50th birthday on 1st April, which is quite appropriate given that it was April’s Fools day. But rather than giving three cheers we should be asking whether this complex tax will ever be simplified, as successive governments have promised.

VAT Turns 50: Golden Jubilee

Everyone moans about VAT, but instead perhaps we should mark the golden jubilee of the nation’s favourite punch-bag of a tax with a party to celebrate its baffling and highly contested existence. So today’s 50th party for VAT will have a selection of all your favourites, including:

• Jaffa Cakes (of course!)
• Gingerbread men (with no chocolate buttons)
• Mega marshmallows (as long as they’re for roasting and not for snacking)
• Turnip crisps (no potato’s allowed as that would make them standard-rated)
• Cornish pasties (but don’t forget to serve them cold)
• Fruit salad (with strict instructions not to blend it into a standard-rated smoothie)
• Yoghurt based puds (but do not forget if it defrosts, it becomes standard rated).

Of course, all of the above will be served with some tasty, zero-rated chocolate Nesquik (banana and strawberry flavours are not available here as they’re standard rated) and if you prefer orange juice, you’ll have to squeeze your own from whole oranges to avoid standard rating.

VAT Turns 50: Ch-ch-ch-ch-changes

Despite reaching 50, and starting to show its age, VAT isn’t likely to get any radical changes. No, this now middle-aged tax stubbornly refuses to iron out the wrinkles and show any form of simplification. It’s no wonder then that many accountants start VAT conversations with clients with a long sigh and inevitably ask the question, ‘how long have you got, as we may well be here for a while’.

VAT became a political football during the Brexit debate, with Boris pledging to scrap all ‘unfair and damaging VAT rules’ foisted on us by the EU. The reality however, was that the only change to happen was the so-called ‘tampon-tax’ element of VAT, which was scrapped on 1st January 2021.

Despite enduring seismic political events – from the financial crash to Brexit and Covid – VAT rules have pretty much remained anchored in the 1970s. The only notable exception being that in the 2020 Budget, the Chancellor finally recognised that some change was necessary with the rise of digital services and zero-rated e-books, digital magazines and e-newspapers.

VAT Simplification – will it ever happen?

Whilst there have been a handful of changes, they’re nowhere near enough. The now disbanded Office of Tax Simplification (OTS) was set the task of reviewing the operation of VAT in 2016 by Chancellor Philip Hammond following the Brexit vote. The OTS suggested ‘23 highly desirable simplifications” that previously we’d been prevented from implementing because of EU law.

The OTS report paid a lot of attention to the VAT threshold because, “the high level of the threshold is having a distortionary impact on business growth and activity”. The OTS noted that the effects of this are businesses hovering under the threshold will limit expansion to avoid the economic and administrative impact of entering the VAT system.

The OTS’s solution was a “smoothing” mechanism for businesses, plus it encouraged other considerations for HMRC to improve the clarity of its guidance and for the government to take a comprehensive review of the multiple rates. All very sensible solutions, but the sad fact is that none of the 23 suggestions have been implemented and to make it even worse, the OTS was wound-up last year.

It has become abundantly clear that successive governments’ ‘no tinkering’ approach to VAT has not worked, but it’s also clear that this attitude is not likely to change anytime soon.

Tax Accountant’s view

So, leaving aside the perennial argument of, is a Jaffa Cake actually a cake or is it a chocolate biscuit, perhaps the greatest gift the government can give VAT on its 50th birthday is simply just reform it.

I must admit VAT has given me and my fellow accountants a wealth of stories to share over a pint or two, but as the tax annually rakes in a small fortune into the government’s coffers, I suspect that it’s here to stay, warts and all!