This 12 months marks 50 years of VAT in the UK. Though the VAT implementation date (April 1, 1973) coincided with All Fools’ Day, the Chancellor of the Exchequer on the time, Sir Anthony Barber, was slightly critical when he made a daring assertion that “VAT will likely be a easy tax on the availability of products and companies”. Regardless of the preliminary intention to maintain the VAT system “easy”, it quickly grew to become clear {that a} easy tax may not be properly suited to deal with complicated dealings within the more and more digitalised and interconnected economic system. Because the tax was catching up with new enterprise fashions and business practices, the regulatory framework was rising in dimension and complexity. Practically 30 years after the introduction of the U.Ok. VAT system, Lord Justice Sedley summarised it as follows: “Past the on a regular basis world … lies the world of VAT; a form of fiscal theme park during which factual and authorized realities are suspended or inverted”.
As we rejoice 50 years of VAT within the U.Ok., it is value reflecting on a few of the most memorable developments within the historical past of the tax. There isn’t any higher supply of VAT idiosyncrasies than the VAT charge system as interpreted in quite a few court docket judgments and rulings. Similar to many different international locations, the U.Ok. applies an ordinary VAT charge (20%) and two diminished charges (5% and 0%) to make fundamental requirements akin to meals extra reasonably priced for low-income folks. Nevertheless, the best way the diminished charges are administered and interpreted feels extra like a stroll in a “fiscal theme park” than a logically designed system guided by sound rules.
U.Ok. VAT intricacies
Underneath U.Ok. legislation, VAT on desserts and biscuits is 0%. Nevertheless, if a biscuit is partly or wholly lined in chocolate, it should be taxed at the usual charge. This bizarre rule led to a high-profile dispute between the U.Ok. tax administration (HMRC) and McVitie’s in regards to the classification of Jaffa desserts (spongy cookies layered with jam and coated with chocolate) that McVitie’s manufactured. HMRC unsuccessfully argued that regardless of its title, Jaffa desserts had been truly biscuits, and since they had been partially lined in chocolate, they need to be topic to VAT.
One other bizarre U.Ok. VAT rule says that potato crisps are topic to twenty% VAT, however maize- and corn-based snacks entice no VAT in any respect. Procter & Gamble misplaced an enchantment towards HMRC when it tried to categorise its Pringles crisps as a maize-based product as a result of the Court docket of Attraction dominated that the potato flour was Pringles’ largest single ingredient. It didn’t matter that the potato content material was lower than 50%.
Even the dimensions of a product could also be essential for the tax-rate dedication. Final 12 months the First-tier Tribunal concluded in an eight-page ruling that outsized marshmallows needs to be VAT-free, though regular marshmallows are topic to a 20% VAT. The truth that outsized marshmallows had been significantly appropriate for roasting justified this totally different therapy. One other court docket case thought-about whether or not protein-rich flapjacks could possibly be handled as desserts and subsequently zero rated for VAT functions, or had been a confectionery merchandise and subsequently topic to twenty% VAT. The court docket dominated that the flapjacks into account weren’t desserts as a result of they weren’t baked and contained vital quantities of protein.
Flapjacks are a really difficult product relating to VAT charges. In its detailed steering entitled, “The bounds of confectionery, sweets, candies, chocolate biscuits, desserts and biscuits: The borderline between confectionery and desserts,” HMRC investigates flapjacks versus different meals classes and observes:
It’s our coverage that there’s a distinction between flapjacks and cereal bars. This coverage growth arose as a result of, on the inception of VAT, flapjacks had been broadly accepted as desserts, and cereal bars weren’t broadly out there, if in any respect… It’s troublesome to attract a borderline between the 2 merchandise, as flapjacks may simply be considered as cereal bars. Nevertheless, the above coverage is, we consider, honest and cheap.
Truthful? Cheap? The tax therapy of meals will be arduous to swallow. However nonsensical VAT guidelines apply not solely to meals. In case you are planning to promote fur objects, HMRC has ready a flowchart that can assist you to determine which tax charge to use. When you reply ten questions, you’ll know that in case your merchandise is created from goatskin, no VAT will apply. Nevertheless, if the goatskin originates from Mongolia, Yemen or Tibet, you should cost 20% VAT. I doubt whether or not Mongolian goats are conscious of their particular standing beneath the U.Ok. VAT legislation.
Elsewhere in Europe
The U.Ok. shouldn’t be the one nation the place the VAT charge system defies frequent sense and is usually resistant to any logical clarification. E.U. international locations have equally weird laws and case legislation. In Germany, guinea pigs are taxed at 19% however rabbits profit from a diminished charge (7%). And within the well-known “Subway” case, the Irish Supreme Court docket dominated that the bread utilized by the restaurant chain Subway wasn’t truly bread and didn’t qualify for the VAT zero charge that usually applies to bread. In response to the Court docket, the important thing issue that determines whether or not bread is bread for VAT functions was the sugar content material. And that was too excessive in Subway’s bread.
Outlook
VAT was heralded as a “easy tax” when launched on the All Fools’ Day in 1973, however has proved to be something however. Whereas VAT has tailored to altering financial circumstances, it has additionally given rise to disputes over marshmallows, spongy desserts and flapjacks. Whereas all of us agree that it doesn’t make a lot sense for courts and tax officers to spend time and taxpayer cash discussing eat desserts or roast marshmallows, there isn’t any indication that rate-related nonsense will cease anytime quickly. Because the U.Ok. VAT enters its second half-century, its idiosyncrasies and weirdness will proceed to entertain us.
The opinions expressed on this article are these of the writer and don’t essentially replicate the views of any organisations with which the writer is affiliated.