History and recent developments of VAT in the UK

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The current standard rate of Value Added Tax (VAT) in the UK is 20% for most services and goods. Subject to various conditions, there are exemptions, which means that some goods earn a reduced rate of 5% (such as home energy) and other items are zero VAT. It’s a complex picture and in this article we explain the history and recent developments of VAT in the UK. 

VAT in a nutshell

VAT is often seen as a taxation system aimed at businesses. Though the collection and accounting burden does fall on private and public organisations, VAT is in fact a way for the Government to raise revenue from consumers. 
 
The system works like this: A consumption tax is paid by the purchaser. To calculate it, businesses add together the costs of making and distributing goods and services, and they can deduct some of the cost of raw materials or services they require to create that sellable commodity. 

Origins of VAT

This way of raising revenue from consumers via businesses is something the UK adapted from systems elsewhere in Europe. The first continental version was a French tax first levied in 1954. 
 
VAT was launched in Britain on 1st April 1973. It was bound up in the decision to join the EU’s Common Market in January 1973. 
 
This was, however, not the first consumption-based tax charged in the UK. A forerunner of VAT was Purchase Tax. This applied different tax rates to goods dependent on how much of a ‘luxury’ they were perceived to be. 
 
The Value Added Tax system sought to clarify and unify this form of taxation and was introduced at a single rate of 10% on all goods and services deemed ‘VAT-able’. 
 
However, the rate quickly dropped in July 1974 to a standard rate of 8% for most goods and services, and a higher rate of 12.5% was added for petrol and ‘luxury’ items. 
 
Within a few years, the Government once more reverted to a single standard rate of VAT, which was set at 15% in 1979 after the conservative party won the general elections.  
 
VAT remained at 15% until the 1991-92 tax year when it was raised to 17.5% to increase revenue. 

This rate lasted for almost 20 years, but with some goods benefiting from a VAT reduction to 5%. Those goods include children’s car seats or sanitary products. Between 2008 and 2010, after a short decrease in standard VAT from 17.5% to 15% and back to 17.5% again, on 4th January 2011, the government set VAT at 20%. 

On 8th July 2020, the government announced a temporary 5% reduced rate of VAT for the hospitality and tourism sector due to the Covid-19 pandemic, which is currently set to end on 30th September 2021.  

For and against VAT

Throughout its time, VAT has divided opinions in the UK. Those who oppose it claim that consumers are being taxed twice over; for their income and then for spending their earnings. Others believe it to be an equitable way of raising revenue from the people who have the disposable income to buy more goods and services. 
 
The UK’s VAT exemptions tend to support the latter argument. For instance, fundamentals such as food, medicines, books and some forms of transport are rated at zero VAT. Also, businesses that produce those items can claim VAT from some of their production costs, in effect supplementing the industries providing basic goods. 

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