In the five decades since Value Added Tax (VAT) came into force on 1 April 1973, it has become the third most prolific source of revenue for the government, behind only National Insurance and Income Tax.
From April 2022 to February 2023, HMRC reports that it collected a staggering £150.5 billion from VAT alone - which is £0.5 billion more than a year earlier. But what do we know about Britain’s most contentious tax?
VAT is a transactional tax and is charged on the supply of certain goods and services. Much of the controversy around VAT comes from its weighted system, which separates goods and services into three distinct categories: taxable (standard-rated - 20%, reduced-rated - 5%, and zero-rated - 0%), exempt, and outside the scope - meaning that businesses can pay no VAT at all on some goods and services.
However, like the English language itself, these classifications are subject to a myriad of rules and, even more confusingly, a vast number of exceptions - which is why navigating VAT can be a legislative minefield for many businesses.
For example, clothes, footwear, and chocolate biscuits fall under the standard rate (20% tax). However, biscuits that are not covered in chocolate fall under the zero percent rate, as do clothes and footwear for children under the age of 14. Electricity and heating are chargeable at the higher 20% tax bracket for businesses - but the reduced 5% rate for domestic premises or charitable enterprises.
It’s no wonder that many business owners get tangled in the red tape of VAT. Let’s look at some notable examples, explore its history, and, crucially, see what the future holds for Value Added Tax - and UK business owners.
VAT came into force in 1973, replacing the earlier consumption charge of Purchase Tax. This was a direct result of Britain joining the European Economic Community (now known as the EU), which meant that the UK government had to enforce national legislation that complied with the EU VAT Code.
Because of this, when businesses wanted to contest a VAT ruling, cases often ended up being escalated all the way to the European Court of Justice (ECJ) - which meant that a ruling could take years to be resolved - as many as 15-20 years in some cases. While the consistency of EU VAT rules means that it effectively levels the playing field for domestic business owners and international investors, these lengthy rulings can often leave embattled business owners out of pocket and patience.
Looking back through the 50 years of VAT, there have been some memorable VAT rulings and highly important legal battles:
At this golf club, membership fees were par for the course. HMRC accepted that funds gained from membership fees for the course would be exempt from VAT, as it fell into the exempt business activity due to the club being a not-for-profit members club.
However, problems arose when HMRC argued that visitors using the facilities paid up to a £38 fee for using the green, which it claimed meant that the club was generating ‘additional revenue’ - making it chargeable at the standard 20% rate.
In a landmark moment for not-for-profit golf courses across the country, it was ultimately judged by the ECJ that HMRC was incorrect. The result? Bridport Golf Club received a refund of £140,000 and up to 400 other member-owned golf clubs were quick to launch similar claims. With 56 golf courses in Lincolnshire alone, it’s clear that this is of major significance to businesses in our region.
More than this, the ruling doesn’t discriminate against one sport or another; it was seminal in proving that there can be no exclusion from an exemption once it is established in law. It also acts as an important precedent for membership sporting clubs around the UK, regardless of whether they host crown green bowling or tennis.
Another area that is heavily regulated by shifting and confusing legislation in terms of VAT is gaming and betting. Typically, games in which the outcome can’t be logically deduced are classed as ‘games of chance’ and because of the uncertain nature of play, these such games are exempt from paying VAT. However, there is (of course) a long list of exceptions.
One such exception was ‘spot the ball’ - a game that older readers might remember was popular in newspapers in the 1970s and 80s. Essentially, it consisted of a still image from a football match that had the ball edited out. The game asked players to try to figure out the location of the football based solely on contextual clues (such as the fans’ reactions, players’ body language, etc). However, it wasn’t enough to just be in the general vicinity of the ball - oh no. Players had to clearly mark a cross in the exact centre of the ball - despite not being able to see it.
The contention here arose because HMRC insisted that this was a game of skill and not chance, which would make it taxable at 20%, rather than enjoying exemption from VAT.
Despite being an ongoing issue for decades, originally being contested by prolific betting pool Littlewoods, the case was only closed in 2016 when online gambling platform Sportech triumphed over HMRC. The Supreme Court declared that it was clearly a game of chance because players had no feasible way of interpreting where the centre of the ball was with reasonable accuracy. As a result, Sportech was awarded £93 million in VAT back payments.
Another staunchly contested subject of VAT and the zero-rated status is takeaway food. As a general rule, most food and drink sold for human consumption is zero-rated if it’s purchased from an outlet that you don’t intend to eat it in (such as a supermarket, for example). In a restaurant, however, the VAT changes to 20% due to the fact that you’re being catered for and this is a service.
But where do you draw the line? This proved to be a defining moment in 2012 when then Prime Minister David Cameron sought to reform the VAT rules so that hot takeaway food, such as Cornish Pasties, would be charged at 20%. The argument? They’re hot and you’re therefore receiving a supply of catering services. What, Mr. Cameron, even if they have just been taken out of the oven and cooling down on the bakery shelf?
After a media frenzy and widespread anger, the government U-turned on this decision. As it stands today, hungry patrons can enjoy a hot pastry at 0% VAT - that is, as long as the pastry is not being actively kept warm - otherwise this would increase to 20%.
Clearly, as the above cases demonstrate, VAT is a complex and confounding piece of legislation that causes headaches for many business owners. The pervasive tax has been in place now for 50 years exactly - but what does the future hold for VAT?
I represent self-employed business owners on the VAT and duties group of the ICAEW and I speak to business owners across the East Midlands every day about this exact issue, so I can confidently say that businesses need less intentionally prohibitive rules and exclusions.
If VAT is to be reformed, it should be made more transparent and drastically simplified - or risk further driving business owners up the wall and occasionally out of business.
HMRC has a big push on digitising VAT currently, and this is likely to be extended more widely as VAT becomes not just an EU tax but as it is adopted across the globe in other non-European countries. But it still doesn’t go far enough in setting clear boundaries and giving businesses lasting certainty.
Since leaving the EU we are no longer bound by the EU VAT directive and enjoy the freedom to develop our own system. Some countries like Brazil, for example, have adopted a split payment system. Is this something we could look forward to in the future?
Under a regime like this, VAT is split at the point that the transaction takes place and the customer pays on their bank card with the sale price going directly to the seller and the VAT (if it applies) going directly to the tax authority. We are a long way off a system like this in the UK but this would certainly shift the onus from over-burdened business owners, making sure that HMRC always receives the tax it is owed and giving businesses the certainty of knowing that, from a VAT perspective at least, they won’t face any sudden surprises.
Whatever the future of VAT, it’s clear that it will continue to be a heavy earner for the government and the treasury - but a clearer, more concise, and less confusing system would certainly be welcomed by businesses all across the East Midlands and indeed the whole of the UK.