VAT at 40: Not simple, not popular, but central to government revenue-raising

The Chartered Institute of Taxation (CIOT) is calling for Value Added Tax (VAT) to get a makeover for its 40th birthday.

VAT was introduced into the UK on April 1st 1973, meaning it will celebrate its 40th birthday on Monday. In its first year it was set at 10 per cent and raised £1.5 billion. In its 40th year it is set at 20 per cent – with a reduced rate of five per cent – and is expected to raise £100 billion for the first time in the year just ending. It is raising a higher share of government revenue than at any time in its history.

Stephen Coleclough, CIOT Deputy President and a VAT Partner at PwC, commented:

“VAT came in in 1973 as a requirement of our membership of the then European Economic Community. Since then it has grown steadily to become one of the central pillars of UK government revenue-raising, bringing in more than a fifth of the money HMRC collects.

“The VAT system is in need of modernisation though. Since it was introduced we have seen huge changes, with greater freedom to trade across borders arising from the abolition of restrictions such as exchange controls, a shift from labour intensive activity to technology and information based activity and a greater use of processes such as outsourcing and cost sharing. As a consequence the system is creaking ever more noticeably.

“There is a strong case for reducing the number of exemptions and exceptions, provided this is linked with a meaningful review of the welfare system to compensate those consumers who are worse off because of the change.  VAT is a very inefficient way to deliver social benefits, partly because it is otherwise extraordinarily efficient in raising revenue.

“However, as the Government found out last year, even small changes to VAT can be controversial. The lesson is that the approach to this area should be strategic and consultative, involving those in affected industries, and over a proper timescale to allow the implications to be debated.

“The watchwords for VAT reform should be simplicity, certainty and proportionality. Anthony Barber, the Chancellor who introduced VAT, promised it would be simple. We are a long way from achieving that!”

Notes to editors

1.       The attached spreadsheet shows a brief history of VAT, including historic levels of receipts and notes on main changes over the last 40 years.


2.       The Boundaries – what does VAT cover?


VAT, in principle, applies to supplies of goods and services in the UK (and the import of goods to the UK). However, a substantial proportion of supplies do not bear VAT as they are zero-rated (ie VAT is charged, but at a 0% rate – meaning VAT on costs can be recovered) or are exempt (ie VAT is not charged, but there is no input tax recovery). Some activities are 'outside the scope' of VAT, the main example being the working by an employee for their employer.


Whilst the zero-rating (ZR) of items is clearly advantageous compared with the now 20% standard rate (SR) or even the reduced rate of 5% (RR – mainly on domestic fuel and power), it does give boundary issues. These are particularly around food. The following notes are very much an outline.

Zero rated
Standard rated
1. Food is zero rated generally…

Basic foodstuffs
'Luxury' items; snacks; confectionery; catering; dietary supplements
Frozen yogurt unsuitable for consumption when frozen
Ice cream, including yogurt ices
Ice cream cones and wafers (treated as biscuits)
Ice cream cones and wafers sold as part of the ice cream
Cakes and biscuits
Biscuits half or more covered by chocolate
Jaffa cakes; bourbons; gingerbread men where the only chocolate is dots for eyes
Chocolate digestives; gingerbread men decorated with chocolate
2. Confectionery is 'sweetened prepared food generally eaten with the fingers' and is SR

Cake decorations, including chocolate chips
Chocolate; sweets; chocolate buttons and flakes
Sesame snaps
Chocolate teacakes (cakes)
Snowballs (confectionery)
Flapjack is almost a subject on its own – basic flapjack is probably a cake or biscuit but adding different cereals and making a 'flapjack bar' can make it confectionery
3. Snacks/Savoury Snacks are usually SR…

Tortilla chips; prawn crackers made from tapioca
Crisps, etc. made from potato, including Pringles; prawn crackers made from potato flour
Corn for popping
Peanuts in shells; chopped nuts in packs specifically for home baking
Salted or roasted nuts in packs
4. Food including drinks but that only goes so far…

Tea; milk; soya milk (including fruit flavoured soya milk)
Alcoholic drinks, mineral water and fruit juice
Meal replacement drinks for slimmers and invalids
Energy/sport drinks including carbohydrate and protein drinks and powders
Tablets of glucose, dextrose & Horlicks
Sports tablets
5. Catering is a major exception to ZR for food and is normally SR…

School meals (if at or below cost – usually exempt as part of 'education')
Meals in restaurants; caterers at receptions
Sandwiches taken away
Sandwiches eaten on the premises; hot take away food, including coffees, toasties, toasted subs etc.
Food (eg pasties, pies) sold warm simply because they happen to be freshly baked, are in the process of cooling down and are not intended to be eaten while hot
Food sold as part of an established hot take-away trade, advertised in a way that indicates it is meant to be eaten hot, or sold accompanied by napkins or forks to enable it to be eaten hot
Bagels toasted to develop a crunchy interior
Croissants heated to keep fresh and prevent hardening
6. Animal feed stuffs are generally ZR (animal includes bird, fish, crustacean & mollusc)…

General feed stuffs for commercial animals including if sold exclusively for 'working dogs'
Pet food
Food for game birds and pigeons
Food for caged birds
Bait suitable for human consumption
Fish bait
Dead animals suitable for feeding to 'exotic' pets
Dead animals, unless specifically prepared, canned or packaged as pet food
7. Children's clothing is ZR and that brings problems of definition…

Clothing suitable for and held out for young children
Clothing suitable/designed for older children/adults
Clothing includes footwear and headgear
Ear muffs; alice bands, shoelaces sold separately
Babies’ bibs and nappies (disposable and reusable)
Feeding cups; rolls of nappy material
Artificial fur clothes and fur lined boots
Fur clothes (what constitutes fur is a whole other subject!)
8. Buildings are another minefield, with supplies in this area a mix of ZR, RR, SR and exempt

Domestic rents (exempt normally)
Commercial rents (can be exempt or SR)
New building
Repairs and alterations to buildings
A new house can include the 'white goods' in kitchen/utility rooms…
…but the builder can't recover the input tax – so it's not a way of getting a VAT-free fridge
Sale of static (non-towable) residential caravans (and static holiday caravans are liable for the reduced rate)
Sale of mobile touring caravans

NB: the above is very much a summary and numerous cases around flapjacks/snack bars/catering/housing etc. have turned on the facts


3.       The Chartered Institute of Taxation

The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.

The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.

The CIOT’s 16,500 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.

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