VAT at 50 in the UK. Will it ever grow up?

Author: Gavin Barker

VAT Director, Bright Grahame Murray

The VAT system in its various names (dependant on where you are in the world) has been adopted by 175 countries and yet it has still not been adopted by the US.

As many people will be aware, on 1st April 2023, UK VAT turned 50. Now we are part way through the designated VAT party year, I thought I would reflect on some of the history and facts about VAT in general and some of the quirky cases within the UK.

First-off a quick history lesson: The creation of VAT is widely attributed to the French civil servant Maurice Lauré in 1954, and known as Taxe sur la Valeur Ajoutée (TVA). It was originally introduced to replace the tax on production and was initially directed at large businesses. It was not until 1968 that the tax was extended to the whole economy.

However, the idea of VAT had in fact been theorised before by Dr Wilhelm von Siemens, a businessman in Germany and Thomas S Adams, an economist in the US.

The UK was a little later to the game. As a requirement of the UK’s membership of the then European Economic Community it was required to implement VAT into the UK. This fateful(?) day was 1st April 1973, which also happens to be April Fools’ Day, when VAT replaced purchase tax.

Anthony Barber, the then Chancellor of the Exchequer, famously claimed that VAT was a “simple tax”. Whilst on the face of it this may be true, it can be a very complex and at times absurd tax.

This was perfectly summed up by Lord Justice Sedley in the Royal & Sun Alliance v C&E Commissioners case in the Court of Appeal [2001], when he stated: “Beyond the everyday world, both counsel have explained to us, lies the world of value added tax (VAT), a kind of fiscal theme park in which factual and legal realities are suspended or inverted”

The first standard rate of VAT in the UK was 10%. The standard rate of VAT in the UK has fluctuated over the years going as low as 8% between July 1974 and May 1979, before increasing to 15%. This rate stayed the same until the rise to 17.5% in March 1991, where it remained steady for a number of years. After a couple of short in time rate changes, the UK standard rate of VAT settled on 20% in January 2011, where it has been ever since.

The UK also has two other reduced rates of VAT which are currently 5% and 0%. These reduced rates, especially the 0% is not always straight forward: for example, rather bizarrely fur from a goat that originates from Mongolia, Yemen or Tibet is standard rated for VAT, whereas all other goat fur is zero rated for VAT.

Not everything is plain sailing when it comes to VAT, as is the case with all taxes. Some issues and disagreements are appealed at tribunals. Some are well known in the UK for amusing reasons, and some are just plain bizarre.

As a bit of background to the first two cases, cakes and biscuits are generally zero rated for VAT in the UK by virtue of VATA 1994, Schedule 8, Group 1. Whilst chocolate covered cakes are also zero rated, chocolate covered biscuits are standard rated for VAT, but remain zero rated if the chocolate is inside. Another strange quirk is that a gingerbread man (or should that be person) with two chocolate buttons/Smarties for eyes are zero rated for VAT. However, if there is any additional chocolate, such as “buttons” down the front of the gingerbread person, this then becomes standard rated for VAT.

In the UK Jaffa Cakes case, (United Biscuits (LON/91/0160), the argument was whether Jaffa Cakes were chocolate covered cakes, or chocolate covered biscuits. HMRC had always treated previously treated Jaffa Cakes as cakes and zero rated for VAT, but reversed this view and deemed them as chocolate covered biscuits and therefore should be standard rated for VAT. Needless to say that HMRC lost the case, and it was proved that Jaffa Cakes were indeed cakes. One of the many deciding factors in this was that cakes go hard when stale, whereas biscuits go soft.

In August 2023, the decision of a case brought by United Biscuits, the owner of the McVitie’s brand, (TC/2022/09475) was in relation to a new range of biscuits known as Blissfuls was released. Whilst there was no argument that both sides agreed that these were indeed biscuits, HMRC argued that the top layer, which was made of biscuit with the McVitie’s logo imprinted did not cover the entire biscuits and therefore the chocolate filling also covered the biscuit making the biscuit standard rated for VAT. Sadly in this instance, United Biscuits lost.

Carrying on the food theme one last time (I promise) there was great uproar when HMRC decided that pasties, sausage rolls, etc. which were sold when warm were deemed as hot food and should therefore be standard rated for VAT. Although this did not go to tribunal, the government backed down. If the pasties, sausage rolls, etc were sold hot incidentally, i.e. they were cooling, then they would still be deemed as zero rated for VAT. However, if they are stored in warming cabinets, they would be standard rated. This appeared to alleviate the public enough!

In the UK, then lease of a car for business generally has an input tax block of 50% on the basis that in most cases, cars are available for private use. A bizarre case that was initially won at first tier tribunal by Christopher Upton t/a Fagomatic (LON/99/746), was in relation to full recovery of input tax on a Lamborghini Diablo. Mr Upton claimed it was solely for business use and was used for transporting cigarettes to clubs to stock up cigarette machines, one of his arguments being that he worked such long hours that he had no social life. HMRC went to the Court of Appeal ([2002] EWCA Civ 520), where they won the case, one of the arguments being that the insurance allowed for private use, therefore the car was potentially made available for private use.

In the case of Audrey Cheruvier t/a Fleur Estelle Belly Dance School (TC/2013/01361), Ms Cheruvier tried to argue that belly dancing as a form of dance should be exempt from VAT under VATA 1994, Sch 9, Grp 6, item 2, “the supply of private tuition normally taught in a school or university by an individual teacher acting independently of an employer.” The appeal was lost on the basis that she was only teaching one form of dance and it was not the type of dance to be taught on schools or universities.

Perhaps the most bizarre case I have seen over the last few years, was an Upper Tribunal appeal by HMRC ([2017] UKUT038) against K E Entertainments Ltd, which HMRC had already lost at the first tier tribunal. The basis of HMRC’s appeal was in essence arguing about their own guidance. In total eight Grounds of Appeal raised.  This included gems such as: although they (HMRC) had released a business brief with new guidance, it should be ignored. My particular favourite argument HMRC made was stating that although the VAT return was incorrect, no mistake had been made, as K E Entertainments Ltd didn’t think it has made a mistake. Needless to say that HMRC lost this appeal and quite rightly too.

Despite the quirks and sometimes frankly strange tribunal cases that occur from time to time, VAT in the UK has proved to be a very successful tax; it remains the third largest source of income for the UK government, with VAT receipts for FY22/23 being £160bn.

Who knows what the next 50 years will bring? One thing I think is certain is that VAT in the UK is here to stay.

About the Author: Gavin Barker is not quite as old as VAT, but has been specialising in this tax in the UK for the last 23 years, covering a wide variety of sectors including retail, ecommerce, property & construction, tech, manufacturing, and healthcare.

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