ALEX BRUMMER: Why do we still have to pay £169bn a year for a tax invented by a bureaucrat in France to help create an EU superstate?

A favourite ploy of any government, when short of cash, is to declare war on tax-dodgers and announce a new brigade of enforcers to chase down the culprits.

The public is given the impression that, at last, the squeeze will be put on those fat-cats and errant corporations that use the smartest accountants and lawyers to help construct elaborate avoidance and evasion arrangements.

However, the reality is very different. It’s so much easier for the Treasury to target small traders, entrepreneurs and shopkeepers, who, through error or lack of resources, fail to deliver fully accurate VAT returns. 

Intrusive inspections by His Majesty’s Revenue & Customs (HMRC) can take weeks and bring firms close to collapse, to the distress of the traders and their families.

Of all the taxes imposed on the British people, VAT has been described by the civil servants’ house journal, Public Sector Executive, as the most ‘pernicious’.

Although Labour’s manifesto pledged to exclude a VAT rise from its first Budget, Sir Keir Starmer and Rachel Reeves have seen an opportunity to engage in some old-fashioned class war by imposing it on independent school fees

Alongside income tax and National Insurance contributions, VAT is one of the Big Three.

In 2023-24, VAT tax receipts in the UK were £169 billion, up from almost £160 billion the previous financial year. Half – yes, half – of all household expenditure is subject to a VAT rate of 20 per cent.

Originally it was introduced by Europhile Tory Prime Minister Edward Heath to help Britain prepare to join his pet project, the Common Market, in 1973. Inspired by a French tax invented by Maurice Laure – a former postal service engineer turned civil servant – we now pay it countless times every day, be it in a cafe for a cup of coffee or buying a new TV.

It is charged on a host of items, from loo rolls and potato crisps to building work. Yet it is subject to quirks – though charged on bras (with an exemption for women who have undergone surgery for breast cancer), caviar is VAT-free.

When Chancellor Rachel Reeves delivers her Budget on Wednesday, there will be scant mention of VAT reform. But any honest government ought to be deeply embarrassed by the eye-watering amount of money it takes from it.

Although Labour’s manifesto pledged to exclude a VAT rise from its first Budget, Sir Keir Starmer and Ms Reeves have seen an opportunity to engage in some old-fashioned class war by imposing it on independent school fees.

Though Britain has left the EU, we are still lumbered with this European-born tax.

Taxation in the UK has spiralled to almost 40 per cent of national output, making us the most taxed among the G7 richest countries, according to International Monetary Fund data. Much of our tax system is over-complicated, with a tax code running to ten million words and 21,000 pages – 12 times longer than the complete works of William Shakespeare.

A brave and thoughtful Chancellor seeking sensible tax reforms could find no better place to start than VAT.

That is especially true now that Britain has thrown off the yoke of governance of Brussels and the fiscal diktats that were part of EU membership.

The levy was designed to be a low-cost, efficient revenue raiser. But widespread exemptions, confusions about which products are VAT-free, distortions and compliance burdens have meant that, according to the Institute for Fiscal Studies, it actually ‘hinders economic performance.’

When the Chancellor delivers her Budget on Wednesday, there will be scant mention of VAT reform, writes Alex Brummer

Also, we all know traders who avoid VAT by asking for payments in cash. Much-hated by builders, plumbers, domestic staff, dry cleaners and numerous others, VAT is to blame for fuelling Britain’s black economy. Astonishingly, it has been calculated that VAT avoidance costs the Exchequer between £150billion and £225billion annually.

Equally hated is the fact that VAT is an indirect tax, paid on consumption and services – thus it is deeply regressive, with the least well-off families paying a larger proportion of their income on VAT than the better off.

Governments regularly tinker with the fiscal rules to take the most poorly paid out of the income tax system, by raising the threshold at which tax is paid, but any small boost is wiped out by the 20 per cent VAT.

Admittedly, zero and reduced-ratings for goods such as food, children’s clothing and domestic fuel are often justified on the grounds that it relieves the burden on poorer people, but in truth it is an inefficient tool for that purpose.

Nothing more symbolises the crazy way that VAT is levied, and the pettifogging bureaucracy and costliness of its enforcement, than Jaffa Cakes.

In the early 1990s, manufacturer McVitie’s defended in court the status of its product as a cake, and not a biscuit, to ensure it remained VAT-free alongside sponges, meringues, flapjacks and marshmallow teacakes. The firm won by arguing that cakes are based on their texture, ingredients and how they change when stale.

The quirks of VAT ratings are certainly confusing. Vegetables, like many food products, are not VAT-liable. That is unless they are ‘ornamental’, such as a cabbage ‘grown for its appearance rather than consumption’.

Engine oil is charged full VAT if bought in the form of petrol, but attracts only a 5 per cent rate if used to heat a home.

And while VAT is not charged on children’s clothing, HMRC rules set out exactly when clothes are not for children any more, and so liable for VAT: ‘[HMRC] accepts that garments are designed for young children as long as they are at or within the tabled measurements. 

These are based on children up to the eve of their 14th birthday, as this is when the body dimensions begin to merge with those of the general adult population’.

Several Chancellors have faced political grief when seeking to use VAT to raise money. After Britain fell out of the Exchange Rate Mechanism (the precursor of the euro) in 1992, Tory Chancellor Norman Lamont sought to increase VAT on home fuel bills from 8 to 17.5 per cent. After a public outcry, the policy was reversed.

Another Tory Chancellor, George Osborne, proposed a 20 per cent levy on hot takeaways. The fury about what became known as the ‘pasty tax’ was such that he beat a hasty retreat.

For centuries, politicians have learned that the essential ingredient of a sound and efficient tax system is simplicity. However, VAT is the opposite – with multiple exemptions, mass avoidance, an army of inspectors and collectors and mind-bogglingly complex rules.

Some have suggested that the best way to resolve the problem is to remove every VAT exemption, which could raise a possible £97 billion a year. But with much of the burden falling on those least able to pay, such an idea would be picking the pockets of the nation’s most vulnerable citizens.

So until we have a Chancellor with boldness and honesty – not qualities associated with Ms Reeves – who can grapple with the VAT monster, we will have this pernicious tax lumbered on us thanks to a French bureaucrat born more than 100 years ago.