History of VAT in the UK

History of VAT in the UK

Our beloved to some and devil to others, VAT has a long 50 years to celebrate! Also born 50 years ago, I’m celebrating too.

The government still managed to charge everyone for trade before VAT history ever existed.

Previous to VAT, the UK used to levy a Purchase Tax, charged at a variable rate on wholesale prices of consumer goods. This began in 1940 and ended in 1973, when Britain joined the EEC. Purchase Tax was applied at the manufacturing and distribution end of a transaction, while VAT is charged at the point of sale and is an indirect tax because the government receives the payment from the seller. This answers the question of what tax the UK used before VAT.

When was VAT introduced in the UK?

VAT is a continental invention and was first introduced in France in 1954. VAT was the price paid by the UK for joining the Common Market in November 1974. However, the actual implementation in the UK was on 1st January 1973, marking a significant shift in the UK’s tax system. In 2022-23, the government expects the revenue collected from VAT to raise £156.7 billion. I doubt the government will be abolishing it any time soon.

UK Historical VAT Rates

Value Added Tax was introduced in 1973 at a standard rate of 10% and applied to most goods and services. This standard rate varied over the years, reflecting political strategies, changing governments, and attempts to mitigate economic problems. On occasion, it has been reduced during the last economic crisis and the pandemic, but mainly it rose from 10% to 15%, then from 17.5% to today’s standard rate of 20%. This details the UK VAT rate history.

Three rates of VAT are currently imposed:

• standard (20%)
• reduced (5%)
• zero-rated (0%)

Some specific goods and services fall outside the VAT system or are exempt.

It is important to ensure goods and services are charged at the correct rates to avoid costly mistakes and penalties; however, the legislation and case law can be difficult to navigate and apply.

This is illustrated by one famous case that determined the VAT liability of Jaffa cakes. Continuing the food theme, since then we have had cases about meatball sandwiches and macarons. The macaron case even made it into the script of Coronation Street when it was mentioned in the Rovers Return.

Operation

As of 2024, the VAT registration threshold stands at £90,000 for UK established businesses providing taxable goods and services in the UK. Any business with a greater turnover than this must register for VAT, while registration for those with a lesser turnover is optional.

Non-established businesses making taxable supplies in the UK do not benefit from a threshold and are required to VAT register as soon as they make a taxable supply in the UK.

VAT must be charged by all VAT-registered businesses on the full sale price of taxable goods or services. This amount is paid to HM Revenue and Customs (“HMRC”) but may be offset with VAT paid out on eligible purchases.

The Way Forward

The rate at which technology has developed has left VAT behind somewhat.

The VAT rules on matters such as cryptocurrency and the metaverse are evolving, but specific guidelines may not be available for all transactions, which leaves us having to apply old legislation to new situations.

HMRC is pushing forward with technology in the way they want taxpayers to comply with VAT. Making Tax Digital is the start; eventually, HMRC will be viewing taxpayers’ records in real time, and the VAT inspection as we know it may become a thing of the past.

Other countries are further forward with VAT compliance and technology, having systems where invoicing is live online.

VAT is the most complicated of all taxes, with its detailed rules that are forever changing. It is always advisable to consult a VAT specialists to ensure you comply with the legislation and avoid costly mistakes and penalties.

Here’s to another 50 years of VAT. I doubt I’ll be around to celebrate its 100th Anniversary, but if I make it to 100, I’ll definitely be retired!!! I’ll be around to celebrate its 100^th Anniversary, but if I make it to 100, I’ll definitely be retired!!!