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What’s the chance of reforming VAT post-Brexit?

/ 17 January 2018

David Whiscombe

There’s a reason why political parties stay in power only for one, two or at most three terms.  It’s not, as is commonly supposed, because they run out of ideas.  It’s because the longer they stay in power the harder it is to do so – because it becomes increasingly difficult to blame the other lot for everything that goes wrong.  Once you’ve been in power for ten or a dozen years, laying the blame for everything from NHS funding to teenage pregnancy at the door of your predecessor starts to wear a bit thin.

The EU, however, is another matter.  For the past 40-odd years it’s been an ever-present scapegoat.  Want an excuse for taking an unpopular step or failing to take a popular one?  Step forward the EU: “our hands are tied”.

And nowhere more so than in the field of VAT.

Everyone knows, of course, that VAT is a European tax, which replaced good old Purchase Tax when the UK joined the Common Market in 1973.  And it was as confusing and alien from the beginning as it was destined ever to be.  What sensible tax could possibly differentiate between, on the one hand, sales on which no VAT is charged and, on the other, sales on which VAT is charged (but at a rate of zero percent)?  And how long did it take the average trader to work out that part of what he paid out was input tax and part of what he collected in was output tax.  At least Purchase Tax had been something that was charged on…er… purchases.  But if you set out, as did the founding nations of the European Economic Community, to design a tax which takes into account half a dozen competing national interests and their different economic circumstances what sort of chimera do you imagine will result?

But there was at least one benefit from VAT: once farmers had worked out that this “tax”, unlike any other tax hitherto levied, generated a quarterly cheque from the government, they discovered in themselves a skill in record-keeping that had previously lain dormant and unsuspected for generations.

It is easy to laugh at the foibles of VAT.  Many of us do so regularly.  The steady flow through the courts of the purveyors of, variously, Pringles, Jaffa-cakes and assorted items of cold, hot, reheated or not-yet-cooled-down food touted either within or outwith the confines of whatever “premises” might have been relevant have been a source of largely harmless entertainment over the years, albeit that one cannot altogether avoid the uncomfortable feeling that in an ideal world there just might have been a more profitable use to which the time and undoubted intellect of the dramatis personae in these courtroom dramas might have been put.

And so to the main point.  Over the years, the character of VAT as a tax mandated by the EU has offered limitless scope for successive governments to deny responsibility for any of its absurdities.  Better than that, the denial is not only plausible – it’s true: other than setting the main rate (and even on that it does not have a completely free hand), government has generally not been able to make its own decisions in the field of VAT – not, at least, without going through the process of seeking a derogation from the EU; a process that is both interminable and uncertain of outcome.  But in the Brave New World of Brexit, such restrictions may fall away: the UK may (dependent, of course, upon the outcome of negotiations for a new trading relationship) regain its sovereignty over VAT.  How, then, might it use any restored powers?

It could in principle abolish VAT altogether and replace it with some other form of tax on consumption.  Highly unlikely, not least because of the disruption that would be caused.  However, it’s likely to be more susceptible to the pleadings of special interest groups for zero or reduced rates on items not currently eligible under EU law.  It might consider abolishing some zero rates: historically, government has been very reluctant to do this not only because it might be electorally unwise, but also because once abolished, EU law would preclude their subsequent reinstatement.  It might even seek to simplify and rationalise some of the seemingly arbitrary categorisation rules, especially in the field of foodstuffs and clothing.  What is clear, though, is that it will no longer be able to throw up its hands and bleat “not our fault”.

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This article first appeared in Accountancy magazine, February 2018. Published by Croner-I Ltd. It is available to subscribers on the Accountancy Live website.

David Whiscombe

Consultant

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