This 12 months marks 50 years of VAT in the UK. Though the VAT implementation date (April 1, 1973) coincided with All Fools’ Day, the Chancellor of the Exchequer on the time, Sir Anthony Barber, was moderately critical when he made a daring assertion that “VAT shall be a easy tax on the availability of products and providers”. Regardless of the preliminary intention to maintain the VAT system “easy”, it quickly turned clear {that a} easy tax won’t be nicely suited to deal with complicated dealings within the more and more digitalised and interconnected financial system. Because the tax was catching up with new enterprise fashions and industrial practices, the regulatory framework was rising in measurement and complexity. Practically 30 years after the introduction of the U.Ok. VAT system, Lord Justice Sedley summarised it as follows: “Past the on a regular basis world … lies the world of VAT; a form of fiscal theme park through which factual and authorized realities are suspended or inverted”.

As we have a good time 50 years of VAT within the U.Ok., it is price reflecting on a number of the most memorable developments within the historical past of the tax. There isn’t any higher supply of VAT idiosyncrasies than the VAT price system as interpreted in quite a few courtroom judgments and rulings. Identical to many different nations, the U.Ok. applies a regular VAT price (20%) and two lowered charges (5% and 0%) to make primary requirements resembling meals extra inexpensive for low-income folks. Nevertheless, the way in which the lowered charges are administered and interpreted feels extra like a stroll in a “fiscal theme park” than a logically designed system guided by sound ideas.

U.Ok. VAT intricacies

Below U.Ok. regulation, VAT on desserts and biscuits is 0%. Nevertheless, if a biscuit is partly or wholly lined in chocolate, it have to be taxed at the usual price. This bizarre rule led to a high-profile dispute between the U.Ok. tax administration (HMRC) and McVitie’s in regards to the classification of Jaffa desserts (spongy cookies layered with jam and coated with chocolate) that McVitie’s manufactured. HMRC unsuccessfully argued that regardless of its identify, Jaffa desserts have been truly biscuits, and since they have been partially lined in chocolate, they need to be topic to VAT.

One other bizarre U.Ok. VAT rule says that potato crisps are topic to twenty% VAT, however maize- and corn-based snacks appeal to no VAT in any respect. Procter & Gamble misplaced an enchantment towards HMRC when it tried to categorise its Pringles crisps as a maize-based product as a result of the Courtroom of Attraction dominated that the potato flour was Pringles’ largest single ingredient. It didn’t matter that the potato content material was lower than 50%.

Even the scale of a product could also be essential for the tax-rate willpower. Final 12 months the First-tier Tribunal concluded in an eight-page ruling that outsized marshmallows needs to be VAT-free, though regular marshmallows are topic to a 20% VAT. The truth that outsized marshmallows have been notably appropriate for roasting justified this totally different therapy. One other courtroom case thought of whether or not protein-rich flapjacks might be handled as desserts and subsequently zero rated for VAT functions, or have been a confectionery merchandise and subsequently topic to twenty% VAT. The courtroom dominated that the flapjacks into consideration weren’t desserts as a result of they weren’t baked and contained important quantities of protein.

Flapjacks are a really difficult product in relation to VAT charges. In its detailed steerage entitled, “The bounds of confectionery, sweets, goodies, chocolate biscuits, desserts and biscuits: The borderline between confectionery and desserts,” HMRC investigates flapjacks versus different meals classes and observes:

It’s our coverage that there’s a distinction between flapjacks and cereal bars. This coverage improvement arose as a result of, on the inception of VAT, flapjacks have been extensively accepted as desserts, and cereal bars weren’t extensively accessible, if in any respect… It’s tough to attract a borderline between the 2 merchandise, as flapjacks may simply be seen as cereal bars. Nevertheless, the above coverage is, we imagine, truthful and cheap.

Truthful? Affordable? The tax therapy of meals could be exhausting to swallow. However nonsensical VAT guidelines apply not solely to meals. If you’re planning to promote fur gadgets, HMRC has ready a flowchart that can show you how to establish which tax price to use. When you reply ten questions, you’ll know that in case your merchandise is made out of goatskin, no VAT will apply. Nevertheless, if the goatskin originates from Mongolia, Yemen or Tibet, you will need to cost 20% VAT. I doubt whether or not Mongolian goats are conscious of their particular standing underneath the U.Ok. VAT regulation.

Elsewhere in Europe

The U.Ok. just isn’t the one nation the place the VAT price system defies frequent sense and is typically proof against any logical rationalization. E.U. nations have equally weird rules and case regulation. In Germany, guinea pigs are taxed at 19% however rabbits profit from a lowered price (7%). And within the well-known “Subway” case, the Irish Supreme Courtroom dominated that the bread utilized by the restaurant chain Subway wasn’t truly bread and didn’t qualify for the VAT zero price that usually applies to bread. Based on the Courtroom, the important thing issue that determines whether or not bread is bread for VAT functions was the sugar content material. And that was too excessive in Subway’s bread.

Outlook

VAT was heralded as a “easy tax” when launched on the All Fools’ Day in 1973, however has proved to be something however. Whereas VAT has tailored to altering financial circumstances, it has additionally given rise to disputes over marshmallows, spongy desserts and flapjacks. Whereas all of us agree that it doesn’t make a lot sense for courts and tax officers to spend time and taxpayer cash discussing the right way to eat desserts or roast marshmallows, there isn’t any indication that rate-related nonsense will cease anytime quickly. Because the U.Ok. VAT enters its second half-century, its idiosyncrasies and weirdness will proceed to entertain us.

The opinions expressed on this article are these of the creator and don’t essentially replicate the views of any organisations with which the creator is affiliated.