Life begins at 40 for VAT?
16 April 2013
Posted by: Author: Debra Dougal, Haslers
Source: Accountancy Age
WHEN TED HEATH's chancellor Lord Barber announced to the nation that the old Purchase Tax was to be replaced by a new taxation system known as Value Added Tax, I was 8 years old.
I may have been aware of this in passing , but it is more likely that I was watching the pilot episode of Porridge or playing with my recent best-ever Christmas gift of a Katy Copycat doll with writing desk. How I loved that doll and cried when her arm got broken so that she could no longer copy what I was writing or drawing...anyway, I digress.
What I certainly wouldn't or couldn't have known was the significant impact of that day, which was to effectively shape my career and personal life (I married a VAT man). Now, as Value Added Tax celebrates its momentous 40th, I take a look back at its highs and lows.
In 1973 VAT was 10%, now the standard rate is double that at 20%. Over the 40 years of VAT's life the rate has only ever been reduced twice, once in 1974 from 10% to 8% and then in 2008 from 17.5% to 15%. On both occasions there followed a substantial increase: to 15% in 1979 and to 20% in 2011. Be careful what you wish for.
But it's not all doom and gloom. We started out with a higher rate of VAT of 25% on petrol and electrical goods - a ‘luxury tax' as it was then known. This was abolished when these items no longer carried their luxury status but we have managed to preserve our zero rate for food, books and children's clothing - despite our European masters' dim view of this.
That's not to say that there hasn't been a chipping away at our zero rates over the years; as children get taller, bigger and more fashion conscious, our size- and style-based zero rates cease to benefit those they were intended for, and the debacle over why an e-book is liable to 20% VAT, while a printed book benefits from a 20% reduction in price rages on. Don't even get me started on food, from whether a chocolate-covered tea cake or Jaffa Cake is a standard-rated biscuit or zero-rated cake, to the "pasty tax" U-turn, food and drink continue to provide entertainment and head scratching for taxpayers, VAT practitioners and the Courts.
As a tax on consumption, payable by the consumer and collected and accounted for by businesses as unpaid tax collectors, VAT is exceptionally successful in bringing in revenue to the Exchequer.
In 2011/12 UK VAT receipts were estimated at £98bn and VAT has now been adopted throughout most of the world, with the notable exception of the US, which still has a sales tax system. VAT is an efficient and effective tax but it has its flaws. Primarily the problem is that VAT was born in a simpler time when a book had pages you turned, potato crisps were made from potato and a smoothie was a chap a girl might meet on a first date and not a fruit-based food/drink.
Our ever expanding tastes and the technological revolution has created so many more products, both goods and services, which fall between the lines of decades-old VAT legislation and leave the taxpayer, their advisers and ultimately the Courts to interpret and try to fit into an out-of-date set of laws.
The most frequently heard complaints about VAT are that it is regressive because the poorest pay a higher percentage of their earnings in VAT than the wealthier; businesses are expected to collect and account for the tax without remuneration or recompense for their efforts and are then subjected to swingeing penalties for any mistake; and the system is open to abuse and attack by clever and organised criminals exploiting the flaws and loopholes that the government is always just too late to close.
Then there is the 20% rate, a far reach from the 10% when the tax was introduced. But spare a thought for the Swedish, Danish and Croatians who pay 25% and the Hungarians where the standard rate is 27%.
Greece and Iceland responded to their economic crises by increasing their VAT rates to 23% and 25.5%, so what might we expect for Italy? Luxembourg has the lowest permissible EC rate at 15% but the planned changes in business to consumer supplies of electronic, telecommunications and broadcasting services will make it less attractive for some businesses to operate from Luxembourg, so maybe we should complain less about our 20% rate. After all we also have the highest VAT threshold for businesses, keeping the smallest enterprises and start-ups out of the VAT net if they choose to be.
This is a time of change for VAT with the prospect of it evolving into a true consumption tax, collected only at the consumption stage, under consideration.
Add to this a worldwide, or at least European Community-wide, single VAT accounting system which looms large and real on the 2015 horizon and I begin to wonder if life really does begin at 40. We are still a way from those goals and so much depends on the health and wellbeing of the European Community but as Bob Dylan said ‘the times they are a changing'.
A quick cast back of the mind to the key events of 40 years of VAT, those memories that might flash before the eyes of a drowning tax, show just how much has happened in the last decade and the significant events that have shaped the tax we have today:
1973 - VAT is 'born'
1989 - Introduction of the option to tax commercial property, introducing another layer of complexity to land and property VAT.
1993 - European single market means removal of borders between EU Member States. Introduction of acquisition tax, Intrastat reporting, EC sales reporting, reverse charge accounting.... and the green light to carousel fraud just in time for the steep upturn in mobile phone use. Carousel fraud costs the UK a conservatively estimated £2billion per year and soared in 2005/6 to an estimated £12 billion in lost VAT.
1999 - The 'tea cakes' fallout and the introduction of the principle of unjust enrichment.
2005 - HM Customs & Excise ceases to exist and is merged with the Inland Revenue to form HM Revenue & Customs.
2006 - The Fleming case renders the introduction of the 3 year cap on claims for overpaid VAT unlawful without a transitional period. This opens the floodgates to claims going right back to 1973 and costs the Exchequer hundreds of millions of pounds.
2009 - Far reaching new penalty regime introduced penalising all errors from careless to concealed and everything in between.
2010 - Place of supply of services rules change to make most business to business supplies taxable where the customer belongs.
2010 - Online filing of VAT returns becomes compulsory for all but the smallest businesses
2015 - The planned introduction of the mini one stop shop, effectively a Europe wide single VAT return for selected services.
Add to these issues of agency or principal, single or multiple supplies, third party consideration and unfair competition, which are just a few of those continuing to confound and confuse and you have the picture of a 40 year-old tax, still struggling to keep up, whilst also evolving and changing and looking to the future with hope and optimism.
For all its flaws, VAT has been my friend, my foe and my constant companion, professionally and personally, for most of my adult life and so I raise a metaphorical glass and say ‘Happy Birthday'!
Debra Dougal is a VAT partner at Haslers and head of UK VAT Advice Ltd