50 Years of VAT

50 years ago VAT was introduced in the UK to replace purchase tax, which began in 1940 to help finance military expenditure during World War 2. None of the current Constable VAT team remember purchase tax or have worked in VAT since its inception, but a few of us have nearly 40 years of VAT experience and have seen many changes over the years. Some of these are summarised below. Whether the next 50 years brings simplification or further complication remains to be seen.

1973  VAT was introduced on 1st April 1973 following Britain entering the EU on 1 January 1973. Initially, a standard 10% rate applied to most goods and services. The chancellor at the time was Anthony Barber, a member of the Conservative party. When VAT was introduced the registration threshold was set at £5,000 (this is equivalent to £77,000 in 2023).  An exemption applied to certain services including insurance, health and educational services.

1974  Under the Labour party, the chancellor Denis Healey reduced the standard rate of VAT to 8% while a higher rate of 12.5% was introduced on some luxury goods including petrol.  This higher rate was doubled to 25% in November 1974 but was reduced back to 12.5% in April 1976.

1978  The VAT registration threshold was doubled to £10,000 (this is equivalent to £73,000 in 2023). By this date 12,213 tax officials were involved in the administration of VAT.

1979 Mrs Thatcher’s chancellor Geoffrey Howe almost doubled the standard rate of VAT to 15% and the higher rate of VAT was abolished.

1991 Conservative chancellor Norman Lamont increased the standard rate of VAT to 17.5% in order to increase revenue. The VAT registration threshold was also increased to £35,000 (this is equivalent to £96,000 in 2023).

1994  Supplies of domestic fuel and power became liable to VAT at 8% on 1st April 1994 and prior to this date, were liable to the zero rate of VAT.

1997 to 2007
During this period further changes took place including the introduction of a reduced rate of 5% VAT in 1997. Examples of some of the products subject to this lower rate were children’s car seats and smoking cessation products. From 1st September 1997, Labour chancellor Gordon Brown reduced the rate of VAT applicable to supplies of domestic fuel and power from 8% to 5%. In 1999, the VAT registration threshold was increased to £51,000 (this is equivalent to £113,000 in 2023)

2008 The standard rate of VAT was reduced from 17.5% to 15% from 1st December. Also, the VAT registration threshold was increased to £67,000 (this is equivalent of around £114,000 in 2023). The chancellor at the time was Alistair Darling.

2010 From 1st January 2010, the standard rate of VAT increased and returned to its previous rate of 17.5%.

2011 The standard VAT rate increased to 20% from 4th January in an emergency budget presented by George Osborne. From 1st April 2011, the VAT registration threshold was increased to £73,000.

2012 to 2019 There are now 3 different rates of VAT that apply to services that are not VAT exempt as follows –

  • Standard rate (20%)
  • Reduced rate (5%)
  • Zero rate (0%)

VAT is now the governments third largest source of revenue after income tax and national insurance. Since 1st April 2017, the VAT registration threshold has remained at £85,000.

2020 – 2023 On 1st January 2021, the UK officially left the EU. Also during this period we experienced the global COVID-19 pandemic, which saw the government introduce a range of temporary rates of VAT to assist businesses particularly impacted by the pandemic, such as tourism and hospitality.

The most significant immediate change to accounting for VAT since the UK left the EU is in relation to imports and the introduction of Postponed VAT Accounting. However, leaving the EU does have wider implications in that the UK is no longer constrained by the need to follow the European wide VAT law laid out in the Principal EU VAT Directive. It will be interesting to see how this influences UK VAT policy in the coming years.  This also significantly increases the risk of double taxation.  Harmonised EU rules are designed to ensure that VAT is only paid once at a location that is agreed by all EU Member States.  They are also designed to ensure that goods or services used in the EU are taxed in the EU, regardless of the fact that they may be subject to VAT elsewhere under the different rules of a non-EU country.

Please note that this blog is intended to provide a general overview of the subject. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this blog post. Specialist VAT advice should always be sought in relation to your particular circumstance.