The History of UK VAT
UK VAT (value-added tax) was first introduced to the United Kingdom’s taxation system on the 1st of April 1973. The UK brought VAT in to replace “purchase tax” which was levied between October 1940 to March 1973.
The initial introduction of purchase tax was to reduce the wastage of the raw materials throughout World War 2, they did this by initially setting the purchase tax rate at 33.33%.
Purchase Tax was abolished when the UK joined the European Economic Community which later evolved into a political & economic union; The European Union. This was replaced with VAT (value-added tax).
Whilst UK VAT is administered and collected by HM Revenue & Customs, under EU law, they cannot lower the standard VAT rate lower than 15%.
The EU allows member states (which currently includes the UK) to have up to a maximum of two reduced VAT rates of at least 5% for a restricted list of goods and services. Should the UK wish to make a temporary reduction of VAT, they must seek The European Council’s approval.
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UK VAT Rate History
To review the UK VAT rate history you must first look to what preceded it, and that would be Purchase Tax. Purchase Tax was introduced into the UK taxation system in October 1940 which was levied at different rates depending on the goods themselves.
Goods deemed luxurious were subject to higher rates, this is was an attempt to reduce the raw material wastage, as the UK was at war with the Axis Powers and needed to conserve resource where possible.
The Purchase Tax rather than being applied to consumers (at the point of sale) like VAT, was applied at the point of manufacture & distribution at wholesale price.
The Purchase Tax rates were as followed:
The definition of VAT is value-added tax. VAT is an indirect UK tax upon services & goods, which is paid to the government by the seller/business.
The consumer will pay VAT on top of their product/service purchase price, which the seller/business later sends to the government in their VAT returns.
Introduction Of VAT In The UK
The UK replaced Purchase Tax with VAT (value-added tax) on the 1st of April 1973. This was because on the 1st of January 1973 the UK joined the European Economic Community. Upon joining the Conservative Chancellor Lord Barber decided to set a single VAT rate of 10% on most goods and services.
However, in July 1974, Labour Chancellor Denis Healey reduced the standard rate of VAT from 10% to 8% and implemented a new higher rate of 12.5% for petrol and certain luxury goods. Later that year in November 1974, Labour Chancellor Denis Healey decided to double the higher rate of VAT to 25%. 17 months later Labour Chancellor Denis Healey then reduced the higher rate of 25% back to 12.5% in April 1976.
Shortly after, 1979 the Conservative party won power from the Labour Party, to which the Conservative Chancellor Geoffrey Howe increased the standard rate of VAT from 8% to 15%.
Chancellor Geoffrey Howe then went on to abolish the higher VAT rate in June 1979. The VAT rate remained at 15% until 1991 when the Conservative Chancellor Norman Lamont increased it from 15% to 17.5%. The next change to UK VAT occurred in April 1994, when Conservative Chancellor Norman Lamont increased the VAT on domestic fuel and power, which had previously been zero-rated to 8%.
On the 1st of September 1997, Labour Chancellor Gordon Brown reduced the lower rate of VAT on domestic fuel and power from 8% to 5%. Labour Chancellor Gordon Brown went on to make a series of VAT reductions on certain products from 17.5% to 5%, these included:
|From the 1st of July 1998, VAT on installation of energy-saving materials reduced from 17.5% to 5%.|
|From the 1st of January 2001, VAT on sanitary protection products reduced from 17.5% to 5%.|
|From the 1st of April 2001, VAT on children's car seats reduced from 17.5% to 5%.|
|From 12th of May 2001, VAT on conversion and renovation of certain residential properties reduced from 17.5% to 5%.|
|From the 1st of July 2006, VAT on contraceptives reduced from 17.5% to 5%.|
|From the 1st July 2007, VAT on smoking cessation products reduced from 17.5% to 5%.|
Labour Chancellor Alistair Darling reduced the standard rate of VAT of 17.5% to 15% from the 1st of December 2008.
Labour Chancellor Alistair Darling then increased the standard rate of VAT of 15% to 17.5% from the 1st of January 2010. Chancellor George Osborne then increased the standard rate of VAT of 17.5% to 20% from the 4th January 2011.
How Does VAT Work In The UK?