I will start today’s Blog with a brief history of Value Added Tax in the UK. VAT was introduced in 1973, replacing Purchase Tax and is the third-largest source of government revenue after Income Tax and National Insurance, amounting to over £167bn in 2024-25 (15.4%, of all tax) . Over the years, different governments, both Labour and Conservative have constantly tinkered with it until 2011 when the current regime came in and which has not materially changed since.
The underpinning Act of Parliament which stipulated which goods or service would be at VAT rates of 0%, 5%, 20% and exempt respectively, was VATA 1994, which is where pretty much all of the current quirks of the tax have their origins.
Why doesn’t VAT just have one single rate?
In a word, ‘politics’. Whilst VATA 1994 underpins everything, it has also allowed successive Chancellors of the Exchequer to tinker round the edges and boy oh boy, have they tinkered! A couple of examples may help illustrate the point.
One of the best-known example is the so-called “tampon tax”. From 1973 to 2011, VAT on sanitary products was at 20%, then over the next 13 years the rate of VAT varied between 20% and 0% with period underwear, excluded as a sanitary products, then included again. Finally on January 1st, 2024, common sense finally prevailed, with all sanitary products were classified as zero rated for VAT.
Another classic example is the VAT rate on loft and cavity wall insulation which was at 20% VAT until 2013. Then the ‘Green Deal’ initiative was introduced with VAT at 5% for these products as well as solar panels, including their installation. Over the succeeding years, the products eligible for the reduced rate seemed to change every other week. A slight exaggeration I will admit, but you get the point.
Then, on April 1st 2022, the VAT rate was reduced again to 0% for a temporary period, but only for a reduced number of products. Finally, in her budget last year, Dear Rachel announced that on 1st April 2027, the rate will return to a minimum of 5%.
The two main areas of VAT controversy
The two main groups of products that have been responsible for over 80% of all VAT disputes at the tax tribunals are clothing and food & drink.
- CLOTHING: Children’s clothes are zero rated, subject to various qualifying conditions, but the key 2 are: To qualify for zero rating, the clothing must be designed for children that are not yet 15 years old and secondly, it must be of a size only suitable for that age group. So, plenty of ambiguity there!
The VAT office, in an attempt to bring clarity, published a schedule of sizes, above which items were chargeable at 20% VAT. All well and good you might think, but they had not factored in that the size and shape of kids has changed significantly over the intervening years. So, you now have the ludicrous situation of children as young 9 years old incurring 20% VAT on their clothes, whilst some adults can easily fit into clothes officially classified as 0% VAT children’s garments.
The other area of potential argument was the design stipulation, which was included to ensure that adults who technically qualified on size would not wear clothing designed for kids. Unfortunately, the VAT bigwigs had not factored in that in the 30+ years since 1994, most fashion for kids is indistinguishable from adult clothing, with the only major exception being school uniforms.
- FOOD & DRINK: As any regular reader of my Blogs will know, this is a subject that I have reported on regularly, such my many Blogs on Jaffa Cakes, mega marshmallows and when something you can drink is classed as a beverage (0%VAT) or a drink (20%).
Taking Jaffa cakes as an example, they’re very similar to many other similar packets of confection charged at 20% but are zero-rated as they’re considered miniature cakes. However, PiM’s brand of chocolate covered raspberry and sponge treats, are liable to 20% VAT. They are however pretty much indistinguishable from their famous cousin; with the only difference I can see is that PiMs use a raspberry jelly and McVitie’s used an orange jelly. Please explain the logic if you can!
In a similar vein, mini marshmallows are VAT zero-rated because they’re deemed to be a cake ingredient. Normal sized marshmallows are at 20% VAT because they’re considered to be a snack food, but giant marshmallows are at 0% VAT because they deemed to be a food because they need some additional cooking, i.e. being plonked on the end of a fork and roasted over a flame. In reality, they’re just different sizes of marshmallows, so why the different VAT rates?
My final example, concerns products categorised as drinks and beverages, with The Oxford English dictionary and Roget’s Thesaurus deeming both words as interchangeable, but not our wonderful VAT system. This classifies a bottle of milk as a beverage at 0%, but classes a bottle of mineral water as a drink at 20%. But it gets worse, the same drink can be at different rates of VAT, dependent upon its temperature. A room temperature cup of coffee is classed as a beverage, but not a drink but serve it cold it’s categorised as a drink and not a beverage and charged at 20% VAT.
Other quirky examples of VAT rates
The reason that VAT has become increasingly complicated over the years is that many products have different rates of VAT based on a seemingly random variety of criteria, which includes, use, size, temperature, source, how they’re cooked or sold, to name but a few. I have therefore compiled a list of what I consider some of the most nonsensical examples:
- Salt for culinary use in retail packs is zero-rated, but if the label states that it can also be used as a water-softener, then it’s 20%.
- Bottled water is at 20% as it’s not considered a basic necessity (I really can’t get my head around that one) but milk is considered a basic necessity and zero-rated, unless of course you flavour it, then it’s at 20%.
- Ice cubes are zero-rated, unless you filter the water first, then they’re at 20%.
- Plain biscuits are zero-rated, but if a thin layer of chocolate is added then they’re vatable at 20%.
- Transport in a vehicle, boat or aircraft is zero-rated if the vehicle can carry at least 10 people but VAT at 20% is charged if the journey is from/to a place of entertainment, recreation or amusement.
- The Greggs ‘Pasty tax’ caused a furore in 2012 as to whether or not a warm pasty constituted hot takeaway food”. The outcome was a classic fudge in that pasties could be sold warm at 0% VAT but became vatable at 20% if deliberately reheated to make them warmer.
Accountant’s view
Whilst I’ve had a lot of fun over the years writing about the many quirks of our VAT regime in the UK, many of which I’ve highlighted in this Blog, one must accept that VAT a regressive tax, paid by all consumers whether they are rich or poor, young or old. I would also argue that it constitutes double taxation as consumers pay for goods and services using income that has already been taxed.
Despite my reservations, VAT does raise a huge amount of money for the Treasury so I have no doubt it will continue as a mainstay of our tax system for many years. I just hope that Rachel Reeves will grasp the nettle and simplify the tax, to make it easier to understand and thereby saving HMRC millions of pounds by not having to constantly takes cases to court to decide which rate of VAT is applicable.
