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Rationale behind VAT exemptions

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plaguedbyfoibles
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Rationale behind VAT exemptions

#463138

Postby plaguedbyfoibles » December 4th, 2021, 6:18 pm

I was just curious about why there are VAT exemptions for certain goods or services but not for others.

Is it largely illogical or is there some rationale, economic or otherwise, behind some of these exemptions?

For instance, Jaffa cakes do not attract VAT as they are regarded as a cake rather than a biscuit, and supposedly, when VAT was introduced in 1973 (one of the conditions of EEC membership), Whitehall saw cake as being a staple food for working class people, so they did not want it to attract VAT.

But then, on the other end, you have new build homes not attracting VAT - although professional services, such as those offered by an architect or surveyor, as part of the process, are standard rated for VAT - whereas home renovations / extensions are subject to the standard rate of VAT.

Is the rationale for this that new build homes expand housing supply, whereas home extensions / renovations do not? Also maybe that when new build homes are purchased, the new homeowners may start using local businesses and spending their money there.

And why do architectural and surveying services attract VAT? Is it maybe because they are higher-end services?

Then you have shoes and clothes for young children being exempt from VAT, whereas school uniforms for those aged 14 and over, to the best of my knowledge, are not exempt from VAT (as per https://www.bbc.co.uk/news/education-41202356).

Maybe in this case, it is as the article suggests, i.e. VAT law hasn't been updated by successive governments in order to resolve / address any anomalies.

I suspect with goods like clothing for small children, or baby milk formula, both of which are zero rated, it's to encourage more people to start a family, by alleviating some of the costs associated with raising children.

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Re: Rationale behind VAT exemptions

#463146

Postby Mike4 » December 4th, 2021, 7:28 pm

As I understand it, VAT is a tax on luxuries like chocolate and extensions to your house, and is therefore not levied on necessities like basic food and clothing, and your house in the first place.

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Re: Rationale behind VAT exemptions

#463149

Postby plaguedbyfoibles » December 4th, 2021, 7:58 pm

Mike4 wrote:As I understand it, VAT is a tax on luxuries like chocolate and extensions to your house, and is therefore not levied on necessities like basic food and clothing, and your house in the first place.


Thanks, that makes sense.

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Re: Rationale behind VAT exemptions

#463152

Postby Mike4 » December 4th, 2021, 8:20 pm

plaguedbyfoibles wrote:
Mike4 wrote:As I understand it, VAT is a tax on luxuries like chocolate and extensions to your house, and is therefore not levied on necessities like basic food and clothing, and your house in the first place.


Thanks, that makes sense.


I can't have explained it properly then :lol: :lol: :lol:

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Re: Rationale behind VAT exemptions

#463184

Postby AF62 » December 4th, 2021, 11:45 pm

plaguedbyfoibles wrote:I was just curious about why there are VAT exemptions for certain goods or services but not for others.

Is it largely illogical or is there some rationale, economic or otherwise, behind some of these exemptions?


Firstly you need to know there are two types of VAT exemption; exemption without deductions (of VAT incurred in making that supply) and exemption with deductions. The latter, exemption with deductions, is more commonly known in the UK as zero rated as the end consumer ends up not paying any VAT at all.

Exemption without deductions taxes the supply by denying the supplier the deduction of the VAT they have incurred. For example a bank supplying exempt (without deductions) services doesn’t explicitly charge VAT on current account fees, but does incur VAT on all the costs of its business which it cannot recover, and as it cannot recover that VAT it is included in the fees charged (without VAT) to its customers.

On the other hand businesses supplying exempt with deductions supplies, aka zero rate, can recover all the VAT they incur, and which has built up through the manufacturing supply chain, so children’s clothes have no VAT on them when bought by the end consumer.

The reasoning behind the exemptions is twofold - those things it is not socially acceptable to tax, and those things it is too hard to tax with a Value Added Tax.

In the first camp are things like housing, education, healthcare, funerals, etc.

In the second, mainly financial. If a bank is involved in currency trading what is the ‘value of the supply’ which you should apply VAT to? It just traded £100 million, should you apply VAT to £100 million, so charge £20 million VAT (which the other party can recover), or simply say it is an exemption without deductions and not allow them to recover VAT on their offices, computer systems, contractors, etc.

However… then you get the lobbying by vested interests.

plaguedbyfoibles wrote:For instance, Jaffa cakes do not attract VAT as they are regarded as a cake rather than a biscuit, and supposedly, when VAT was introduced in 1973 (one of the conditions of EEC membership), Whitehall saw cake as being a staple food for working class people, so they did not want it to attract VAT.


That isn’t the reason why cakes don’t have VAT charged but biscuits do.

At the time, biscuits were made in factories but cakes were made by the local small bakery. There was a lot of lobbying on behalf of small local businesses, so cakes were zero rated.

Next you have the ‘luxury’ aspect, so plain biscuits are zero rated but chocolate biscuits were luxurious so are liable to VAT - although that is where you get oddities - only biscuits which have chocolate *on* them are liable to VAT., so chocolate digestives do but chocolate bourbons don’t because their chocolate layer is between the biscuits so it is *in* the biscuit not *on* it.

Then you get the very amusing oddities - pet food is liable to VAT because pets are a luxury, but is a sheep dog used by a farmer a ‘pet’ - answer it isn’t, so it’s food isn’t liable to VAT.

plaguedbyfoibles wrote: But then, on the other end, you have new build homes not attracting VAT - although professional services, such as those offered by an architect or surveyor, as part of the process, are standard rated for VAT - whereas home renovations / extensions are subject to the standard rate of VAT.

Is the rationale for this that new build homes expand housing supply, whereas home extensions / renovations do not? Also maybe that when new build homes are purchased, the new homeowners may start using local businesses and spending their money there.

And why do architectural and surveying services attract VAT? Is it maybe because they are higher-end services?


New housing is seen as ‘a good thing’ and thus isn’t liable to VAT and is zero rated.

The architectural and surveying services, although chargeable with VAT, are mostly supplied to the developer who will recover the VAT when they sell the new residential dwelling without VAT as zero rated.

Commercial buildings are an absolute minefield as the supplier can choose whether to charge VAT or not. If they do then they can recover VAT on their costs, if not they cannot.

Initially extensions and renovations were also zero rated, but this was changed in the early 80s by the government of the time as they didn’t consider such work should benefit from zero rating as it didn’t increase the housing stock - with some exceptions, such as work on listed buildings, churches, etc. as that work was still seen as a ‘good thing’.

More recently renovation work on some properties that have been unused for some time, or conversion of non-residential to residential, and residential to a greater number of residential properties, now benefits from a reduced rate of VAT, because again it is seen as a ‘good thing’.

The sale of ‘used’ houses is exempt from VAT because if it wasn’t then every time an individual moved house and sold their home they would have to register for VAT as they would have exceeded the VAT registration threshold.

Letting of residential property is exempt without deduction so there is effectively some VAT within the supply from the landlord’s overhead costs (but not the purchase of the property itself).

plaguedbyfoibles wrote: Then you have shoes and clothes for young children being exempt from VAT, whereas school uniforms for those aged 14 and over, to the best of my knowledge, are not exempt from VAT (as per https://www.bbc.co.uk/news/education-41202356).

Maybe in this case, it is as the article suggests, i.e. VAT law hasn't been updated by successive governments in order to resolve / address any anomalies.

I suspect with goods like clothing for small children, or baby milk formula, both of which are zero rated, it's to encourage more people to start a family, by alleviating some of the costs associated with raising children.


Zero rating of clothing for ‘young children’ (being those under 14) is a hangover from Purchase Tax when it wasn’t charged on clothing for children at school and the school leaving age was 14. When VAT was introduced, even though the school leaving age was no longer 14, the government was keen not to tax things that hadn’t previously been taxed so left the anomaly alone.

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Re: Rationale behind VAT exemptions

#463189

Postby Alaric » December 5th, 2021, 1:02 am

AF62 wrote:When VAT was introduced, even though the school leaving age was no longer 14, the government was keen not to tax things that hadn’t previously bee taxed so left the anomaly alone.



There was a referendum in 1975 on continued membership of the EEC. Taxing food, children's clothing, books and newspapers would have been an easy target for those who thought membership of the EEC a bad thing. The same would have applied in 1972 when the changes needed to join the EEC in the first place had to get throuigh Parliament.

Much later in 1995, VAT was applied to domestic energy bills. When the 1997 government considered abolishing it, they found they couldn't, holding at 5% being all they could do because of EU rules.

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Re: Rationale behind VAT exemptions

#463287

Postby AF62 » December 5th, 2021, 2:33 pm

Alaric wrote:
AF62 wrote:When VAT was introduced, even though the school leaving age was no longer 14, the government was keen not to tax things that hadn’t previously bee taxed so left the anomaly alone.



There was a referendum in 1975 on continued membership of the EEC. Taxing food, children's clothing, books and newspapers would have been an easy target for those who thought membership of the EEC a bad thing. The same would have applied in 1972 when the changes needed to join the EEC in the first place had to get throuigh Parliament.


But in 1975 the Conservative government of the day wanted the UK to remain in the EEC, so were unlikely to jeopardise a ‘yes’ vote by suggesting giving up the derogations that had been obtained in 1972/3 and to remove the zero rating on food and children’s clothing.

As for taxing newspapers, no politicians are that stupid.

Alaric wrote: Much later in 1995, VAT was applied to domestic energy bills. When the 1997 government considered abolishing it, they found they couldn't, holding at 5% being all they could do because of EU rules.


Yes, whilst a member of the EU once a derogation was given up it could never be claimed again. However there is now no restriction on that so the government could, if it wanted to, zero rate domestic fuel again.

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Re: Rationale behind VAT exemptions

#463401

Postby ursaminortaur » December 6th, 2021, 9:30 am

AF62 wrote:
Alaric wrote:
AF62 wrote:When VAT was introduced, even though the school leaving age was no longer 14, the government was keen not to tax things that hadn’t previously bee taxed so left the anomaly alone.



There was a referendum in 1975 on continued membership of the EEC. Taxing food, children's clothing, books and newspapers would have been an easy target for those who thought membership of the EEC a bad thing. The same would have applied in 1972 when the changes needed to join the EEC in the first place had to get throuigh Parliament.


But in 1975 the Conservative government of the day wanted the UK to remain in the EEC, so were unlikely to jeopardise a ‘yes’ vote by suggesting giving up the derogations that had been obtained in 1972/3 and to remove the zero rating on food and children’s clothing.

As for taxing newspapers, no politicians are that stupid.

Alaric wrote: Much later in 1995, VAT was applied to domestic energy bills. When the 1997 government considered abolishing it, they found they couldn't, holding at 5% being all they could do because of EU rules.


Yes, whilst a member of the EU once a derogation was given up it could never be claimed again. However there is now no restriction on that so the government could, if it wanted to, zero rate domestic fuel again.


They may be stupid enough to raise VAT on energy though in the name of meeting their climate change commitments - it wouldn't be the first time.

https://www.dailymail.co.uk/news/article-10269977/Call-green-hike-gas-bills-meet-global-climate-change-targets.html

The UK must consider putting up the rate of VAT on gas to meet its international commitments to halt global warming, the government’s climate change advisers said yesterday.

At present VAT on gas is 5 per cent for domestic users instead of the full rate of 20 per cent, and the committee on climate change said that this could be seen as a ‘subsidy’.


https://researchbriefings.files.parliament.uk/documents/RP97-87/RP97-87.pdf

In his March 1993 Budget speech the then Chancellor, Norman Lamont, proposed to introduce VAT at the standard rate on domestic supplies of fuel and power.

These supplies had been zero-rated since the introduction of VAT in 1973. Supplies would be taxed at a reduced rate of 8% from 1 April 1994, before becoming liable to VAT at the standard rate - currently 17.5% - on 1 April 1995.

In his speech Mr Lamont argued this measure would help the UK meet its commitment under the United Nations Framework Convention on Climate Change, signed at the Rio summit in 1992, to reduce greenhouse gas emissions by the year 2000 to their level in 1990


In the event there was a rebellion in Parliament and the rise to 17.5% didn't happen with VAT on domestic energy being left at 8% until the next government lowered it as far as it could to 5% - EU rules preventing it being removed completely once VAT had been imposed.

On 1 April 1994 domestic supplies of fuel & power became liable to value added tax (VAT) at the reduced rate of 8%. It had been the Conservative Government's intention that these supplies would be charged the standard rate of VAT - currently 17.5% - the following year.

However in December 1994 the Government was defeated on a Budget Resolution vote on this question, and was required to introduce amending legislation so that these supplies continued to be charged VAT at 8%. In October 1995 the Labour party announced its intention to cut the rate of VAT on domestic supplies of fuel & power from 8% to 5%, a commitment included in their election manifesto. On 2 July 1997 in his Budget speech the Chancellor, Gordon Brown, announced that the new 5% rate would come into effect on 1 September 1997.

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Re: Rationale behind VAT exemptions

#465814

Postby Eboli » December 14th, 2021, 5:51 pm

VAT is a European Tax.

Normally (under the 6th Directive) a mew member state of the EU was allowed to retain 2 rates of VAT (the standard rate and the lower rate) plus certain exemptions provided by the directive. Note that VAT exempt means outside the scope with the result that inputs attributable to exempt supplies are not normally recoverable except where various special rules apply (e.g. partial exemption) or certain de minimis rules apply. In addition, however, the UK managed to negotiate on entry a 3rd rate of VAT - the zero rate - on the condition that if ever a good or service supply was transferred from being a zero-rated supply to a supply at the lower or standard rate it could never revert to zero-rate. The most important example of this is domestic fuel which was moved from zero rate to lower rate and had to remain at lower rate whilst the UK was in the EU. Zero rate is very advantageous because no output tax is charged (it is really charged at 0%) but inputs attributable to such supply are fully allowed for reclaim purposes.

The rules as to what good or services could qualify for lower rate or exemption are laid out in the Directive and done so in general terms. Obvious with a draft based mainly on Roman law concepts of property rights it is somewhat difficult to determine what side of the line certain supplies lie. Jaffa cakes (biscuits v cakes) may be one example, but, e.g., fishing rights was another (licences to use versus licences to occupy is a very tricky area of UK land law and VAT interface). Improvement rather than repairs to listed buildings was another boundary problem. The OP asks:

Is the rationale for this that new build homes expand housing supply, whereas home extensions / renovations do not? Also maybe that when new build homes are purchased, the new homeowners may start using local businesses and spending their money there.

And why do architectural and surveying services attract VAT? Is it maybe because they are higher-end services?


The answer to the first question (new build v. extensions & renovations) is simply that that was where the boundary was in th 6th Directive. The answer the the second (services of an architect or surveyor) results from the clue in the name - these are services separated from the supply of goods.

The children clothes is an example of the narrowing of the scope of a zero-rated supply that cannot be reversed.

Of course, one of the benefits of leaving the EU is that the Uk is no longer bound to boundaries on VAT rates and exemptions. It is surprising that the UK Government has not made more of this freedom to date.

Eb.

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Re: Rationale behind VAT exemptions

#465825

Postby Lootman » December 14th, 2021, 6:11 pm

ursaminortaur wrote:They may be stupid enough to raise VAT on energy though in the name of meeting their climate change commitments - it wouldn't be the first time.

I am not sure we should be taking lectures on energy prices from countries that are much warmer than the UK, and therefore for whom the cost of heating homes is not such an issue.

As a small crowded country the UK saves energy on other things like transportation, much of which is public and over relatively short distances.

Who will put their hand up if we charge VAT at 20% on heating bills and then old people all across the country start dying of hypothermia from not being able to afford to heat their homes? Maybe the winter fuel allowance should be increase manyfold to help? Or would that be another "subsidy" for those who "waste" energy by trying to keep warm?

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Re: Rationale behind VAT exemptions

#465842

Postby ursaminortaur » December 14th, 2021, 6:58 pm

Lootman wrote:
ursaminortaur wrote:They may be stupid enough to raise VAT on energy though in the name of meeting their climate change commitments - it wouldn't be the first time.

I am not sure we should be taking lectures on energy prices from countries that are much warmer than the UK, and therefore for whom the cost of heating homes is not such an issue.

As a small crowded country the UK saves energy on other things like transportation, much of which is public and over relatively short distances.

Who will put their hand up if we charge VAT at 20% on heating bills and then old people all across the country start dying of hypothermia from not being able to afford to heat their homes? Maybe the winter fuel allowance should be increase manyfold to help? Or would that be another "subsidy" for those who "waste" energy by trying to keep warm?


I'm not sure where I said anything about taking lessons from other countries. My comment was pointing out that Norman Lamont whilst Chancellor in Major's Tory government had put VAT on domestic energy at 8% and had intended to then raise that to the standard VAT rate at the time of 17.5%. Lamont had argued that the imposition of VAT at these rates would help the UK meet its climate commitments.

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Re: Rationale behind VAT exemptions

#465850

Postby Lootman » December 14th, 2021, 7:19 pm

ursaminortaur wrote:
Lootman wrote:
ursaminortaur wrote:They may be stupid enough to raise VAT on energy though in the name of meeting their climate change commitments - it wouldn't be the first time.

I am not sure we should be taking lectures on energy prices from countries that are much warmer than the UK, and therefore for whom the cost of heating homes is not such an issue.

As a small crowded country the UK saves energy on other things like transportation, much of which is public and over relatively short distances.

Who will put their hand up if we charge VAT at 20% on heating bills and then old people all across the country start dying of hypothermia from not being able to afford to heat their homes? Maybe the winter fuel allowance should be increase manyfold to help? Or would that be another "subsidy" for those who "waste" energy by trying to keep warm?

I'm not sure where I said anything about taking lessons from other countries. My comment was pointing out that Norman Lamont whilst Chancellor in Major's Tory government had put VAT on domestic energy at 8% and had intended to then raise that to the standard VAT rate at the time of 17.5%. Lamont had argued that the imposition of VAT at these rates would help the UK meet its climate commitments.

I thought you were implying that the UK should "do its bit" for the alleged global commitment to reduce carbon emissions by raising taxes on energy use.

I was pointing out the downside to that argument.

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Re: Rationale behind VAT exemptions

#465864

Postby ursaminortaur » December 14th, 2021, 8:41 pm

Lootman wrote:
ursaminortaur wrote:
Lootman wrote:I am not sure we should be taking lectures on energy prices from countries that are much warmer than the UK, and therefore for whom the cost of heating homes is not such an issue.

As a small crowded country the UK saves energy on other things like transportation, much of which is public and over relatively short distances.

Who will put their hand up if we charge VAT at 20% on heating bills and then old people all across the country start dying of hypothermia from not being able to afford to heat their homes? Maybe the winter fuel allowance should be increase manyfold to help? Or would that be another "subsidy" for those who "waste" energy by trying to keep warm?

I'm not sure where I said anything about taking lessons from other countries. My comment was pointing out that Norman Lamont whilst Chancellor in Major's Tory government had put VAT on domestic energy at 8% and had intended to then raise that to the standard VAT rate at the time of 17.5%. Lamont had argued that the imposition of VAT at these rates would help the UK meet its climate commitments.

I thought you were implying that the UK should "do its bit" for the alleged global commitment to reduce carbon emissions by raising taxes on energy use.

I was pointing out the downside to that argument.


No, exactly the opposite. I was pointing out that a previous Tory government had tried to raise VAT on domestic heating to the standard rate in the name of dealing with climate change and that I wouldn't put it past this government to try it again even though it would be a really stupid move.

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Re: Rationale behind VAT exemptions

#465874

Postby Lootman » December 14th, 2021, 9:10 pm

ursaminortaur wrote:
Lootman wrote:
ursaminortaur wrote:I'm not sure where I said anything about taking lessons from other countries. My comment was pointing out that Norman Lamont whilst Chancellor in Major's Tory government had put VAT on domestic energy at 8% and had intended to then raise that to the standard VAT rate at the time of 17.5%. Lamont had argued that the imposition of VAT at these rates would help the UK meet its climate commitments.

I thought you were implying that the UK should "do its bit" for the alleged global commitment to reduce carbon emissions by raising taxes on energy use.

I was pointing out the downside to that argument.

No, exactly the opposite. I was pointing out that a previous Tory government had tried to raise VAT on domestic heating to the standard rate in the name of dealing with climate change and that I wouldn't put it past this government to try it again even though it would be a really stupid move.

Well as you know I oppose all tax increases in principle. So I guess we are in agreement here!


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