UK VAT – The History of VAT

UK VAT (value-added tax) was added 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.

VAT Meaning – What Does VAT Mean

The definition of VAT is a 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.

 

How Much Does The UK Earn From VAT

VAT is the UK’s third-largest source of government revenue. For example, The Office for Budget Responsibility expects VAT to raise £136.6 billion in 2019-20. (Source)

 

How Does VAT Work In The UK

  • VAT (value-added tax) is an indirect tax based on the value of the goods or services. It is applied to the majority of goods and services, only a select few are considered VAT exempt.
  • VAT is only charged when a VAT registered business sells VAT taxable goods or services to the consumer, which includes businesses.
  • VAT is shown already included within the price when consumers purchase products, for example, when you purchase a product for £2 you pay £1.67 for the product and £0.33 is VAT.
  • VAT often is and can be shown on top of the price within B2B (business-to-business) environments and sales. For example, you can visit a B2B website and they will advertise this product costs £416.67 ex VAT, which means it costs £500 once they have included VAT. The reason B2B show the price excluding VAT is because if the business purchasing their goods or services is VAT Registered they can reclaim the VAT on their purchases.
  • VAT charged by the business on their good or service is collected by the business on behalf of HM Revenue & Customs and paid through their VAT Returns.
  • When filing VAT returns if a business has paid more VAT than they have charged, they can claim the difference from HM Revenue & Customs. For example, if a business spent £1000 on VAT but only charged £800 in VAT, they would be able to claim the £200 difference from HM Revenue & Customs.
  • Any business selling VAT taxable products or services may become VAT registered. If however, the businesses have a turnover above the VAT threshold (2019 VAT Threshold is set to £85,000), will be required by UK law to complete VAT registration. Once the business has become VAT registered, they are required to charge VAT at the applicable rate on all VAT taxable sales to UK customers.
  • It is required that VAT-registered businesses charge VAT to EU based customers who do not have a valid VAT number. VAT will not be charged on sales to EU customers who possess a valid VAT number.
  • VAT registered businesses selling to any other country must not charge VAT.
 
 

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;

  • October 1940: 33.33%
  • April 1942: 66.66%
  • April 1943: 100%
  • April 1946: 33.33%

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.

The information above has been verified & approved by a Chartered Accountant