The History Of The VAT Rate

VAT is paid by the consumer.

Value Added Tax (VAT) is essentially a tax on consumption. The more a person buys and consumes, the more tax he pays. This is an alternative to income tax, and critics argue that it places an unfair burden on lower- and middle-income families. The tax is paid at every stage of production and manufacture, and is claimed back from the government by sending in a record of the paid VAT to its revenue department. However, it cannot be claimed back by the ultimate consumer.

The Common Market

VAT rates are often changed

The Common Market was the original name for what is now known as the European Union. The Common Market, which has gained significantly in size and complexity, played a part in the adoption of VAT in member countries. The VAT system was adopted in France in 1954. After this, the Common Market made it a requirement for membership. The UK joined the Common Market in 1973 and replaced its existing sales tax with VAT.

Changes to VAT

VAT rates are often altered in the country's national budget.

Governments often make changes to the VAT rate and also to its execution; some goods and services are subject to a lower rate, or are exempted altogether. However, all member states within the EU must draw up legislation enacting the provisions of the 6th European Community (EC) Directive. Each government has discretionary power regarding how to apply VAT in its own country, such as ways to collect it, and whether its emphasis should be on income or consumption.

VAT in the UK

VAT is charged on fuel.

In 1973, a standard VAT rate of 10 percent was introduced in Britain. This was lowered to 8 percent in 1974. With much controversy, a higher rate was put on petrol a few months later. This higher rate was abolished by the Thatcher government and a unified rate of 15 percent was introduced. This has been extended since then. In 1991, the standard rate was increased to 17.5 percent, and in 1994, a VAT rate of 8 percent was imposed on domestic fuel and power.

Use of Vat in Collecting Revenue

Economists and politicians may clash on the effectiveness of this method of taxation. Those involved in the production and manufacture of goods can claim the tax back so this sector is protected from taxation on what is a contribution the economy of the country. Consumers are financially impacted by VAT, and it could be argued that a high rate of VAT pushes down spending and depresses the economy. Governments retain the power to make certain goods exempt from VAT, and this often causes controversy.

Exemptions and Anomalies

There are three rates of VAT: standard, reduced and zero. This means that certain goods, considered to be essential, can be exempt from VAT. This can include food but not food eaten at a restaurant, which will incur VAT because it is considered a luxury. At one point in the UK, there was even a court case deciding whether "Jaffa Cakes" should come under the category of cake, which would have been exempt, or a chocolate-covered biscuit, which is considered a luxury and subject to VAT. To support its case, Jaffa produced a large version of its cake, which ultimately made it exempt from VAT.

References

• British Broadcasting Company: History of VAT