Slightly rippled with a flat underside

[venta]

So. Some think-tank, somewhere, has suggested that VAT be made more simple.

The sentence our office picked out of this report was this:

Extending VAT to most spending would "reduce complexity and avoid costly distortions to consumption choices", the report said.

We tried - and we tried quite hard - to understand this. And failed. Yes, extending VAT would reduce complexity (for businesses, if not for end consumers). But that other bit... how does that work? In what way does VAT cause "costly distortions" that would be fixed if everything attracted VAT?

(exspelunca, I'm looking at you for help here!)

Extending VAT - at a fixed rate - to "most spending" would, I think, be a crying shame. Please note, I don't say that it isn't a good idea - I don't feel I've got enough of a grasp on the economics to have much of an opinion on that.

However, it would be terribly disappointing. Why's that? Well...

I realised that I had no idea what rules governed which foods had VAT on them. So I went to look it up.

The HMRC guidelines are hilarious. No, really. They're very funny (if you're me).

The rules are clearly the result of someone trying to take broad principles and tie them down. And, as any decent munchkin will know, any set of rules will probably have some silly extremes to which they can be taken. Edge cases are your friends.

So, we start off with odd things like koi carp. They're ornamental fish, so are taxed at standard-rate (SR). Unless you prepare them for human consumption, in which case they don't attract tax (zero-rated, ZR).

But the real fun starts with baked goods. In case you're curious, baked goods which attract standard-rate tax are:

* biscuits wholly or partly covered in chocolate (or some product similar in taste and appearance); and
* any item of sweetened prepared food, other than cakes and non-chocolate biscuits, which is normally eaten with the fingers
* biscuits which belong to the Emperor

(OK, I did make the last one up).

Bready products are ZR, unless they are wrapped round food for take-away purposes, in which case they're SR. Millionnaire's shortbread is ZR, but partially chocolate-coated shortbread is SR - presumably, as a colleague pointed out, because the caramel acts as an insulation layer to keep the tax away. Having presented a two-column table with these corresponding items appearing by row, the last row rather oddly tells you that Lebkuchen is ZR, but coconut ice is SR. I'm not sure of the connection there.

There's a special case for gingerbread men, by the way. Biscuits decorated with chocolate are filed under "partially coated" and attract SR tax - except in the case of gingerbread men, if "this amounts to no more than a couple of dots for eyes". The HMRC makes no attempt to address the well known cake/biscuit dilemma with respect to Jaffa cakes, and merely provides them with their own entry in the table (they're ZR, which means HMRC obviously thinks they are not a "wholly or partly coated biscuit").

If you sell a hot pie for take-away, that's SR. If you sell a hot pie to someone to take away and eat, but it's merely hot because it's recently come out of the oven and hasn't cooled down yet, that's ZR. Dried fruit for snacking is SR, but dried fruit sold for "snacking and baking" is ZR.

And that's before you reach paragraph 3.7.3, "Drinks which are not beverages".

Honestly, it's a lot of fun. Go and have a read :)

Comments

[mister-jack.livejournal.com]

"But that other bit... how does that work? In what way does VAT cause "costly distortions" that would be fixed if everything attracted VAT?"

One example that springs to mind, is computer books. Include a CD with them and they become eligible for VAT, pushing up the price by almost a fifth. I'd be surprised if this shift hasn't affected buying and/or publishing decisions about whether to include a CD or not.

I think that's the kind of thing they're talking about.

[venta.livejournal.com]

OK, that's more convincing than anything we managed to come with.

I'm still not sure it's helpful, though. Suppose you can buy a book, at £10, or a book + CD at £12 (because it has VAT[*]). I'm not sure something to remedy this "costly distortion" that makes them both £12 is really an improvement for the consumer.

(Publishing decisions based on this may be more complicated, so I'm ignoring them for now.)

[*] VAT will be a fifth next year, so I'm not oversimplifying, I'm early :)

[mister-jack.livejournal.com]

But think of the extra tax revenues!

And, yes, it's more the publishing decisions they're probably thinking about. The IFS are generally sane as far as economic think tanks go, but I suspect they probably still of the "invisible hand of the market" school of thought. The savings to us will come from More Efficient Markets!

Another example, and one which really does distort things, is the levelling of VAT on building goods for repair but not on new houses. This frequently tips it over so that it's cheaper to knock down a house and build a new one in its place than do up an existing building.

[venta.livejournal.com]

Yes, I suppose the current regime is costly to the government, as think of all those products they don't get their 17.5% on! I admit I had read the aobve bit about consumption choice as relating to the consumer, but maybe I didn't have my appropriately cynical hat on.

Buildings is a good example, though.

[mister-jack.livejournal.com]

In fact the IFS report summary says this:

seek neutrality. Tax systems that distort people’s behaviour by treating similar activities differently without very good reason – as the UK system currently does – create inefficiency, complexity and opportunities for avoidance. Exceptions, to deal with the costs of smoking or pollution for example, should be limited and carefully designed.

In the introduction and this specifically about indirect taxes:

The UK applies a zero rate of VAT to far more goods and services than most other countries. Reduced and zero rates of VAT (for example on food) are often justified as a way of helping people on low incomes. But this is an expensive and highly inefficient way of doing so. Charging a reduced rate of VAT on domestic fuel consumption has all these defects and, in addition, effectively subsidises energy use and encourages carbon emissions.

* VAT should be extended to nearly all spending. This would reduce complexity and avoid costly distortions to consumption choices. The money raised can be spent on cutting income taxes and raising benefits in a way that is broadly distributionally neutral, and that protects work incentives, although inevitably there will be winners and losers from such a change.

* It is hard to apply VAT to financial services in the same way that it is applied to other goods and services. But a tax broadly equivalent to VAT should, and we believe could, be applied.

[venta.livejournal.com]

You get a gold star for digging out the actual report. I didn't think of that :(

That (regardless of whether you agree with it or not) does at least make it a lot more comprehensible. Pity most reports chose to miss most of it out.

[mister-jack.livejournal.com]

Yay! Gold Star!

It makes more sense in the context of the report (it's linked from the BBC article*), since they're advocating an comprehensive overhaul of tax and benefits and the VAT change comes in the context of other changes.


* - I know, I know! I wouldn't have believed it if I hadn't seen it myself. Actually, HTML link to the primary source! Amazing.

[nalsa.livejournal.com]

Jaffa cakes are ZR because they're cakes, which are ZR. Court case and everything.

[venta.livejournal.com]

Hmm. Yes. Wasn't it based on the idea that:

- cakes go dry/hard if left out
- biscuits go soggy/soft if left out
- jaffa cakes go dry

QED?

[nalsa.livejournal.com]

That's the one.

[hoiho.livejournal.com]

Yes, inter alia, that was UB's case.(United Biscuits (UK) Ltd v The Commissioners of Customs and Excise, London Vat Tribunal LON/91/160, should you care):

"8. A Jaffa Cake is moist to start with and in that resembles a cake and not a biscuit; with time it becomes stale, and last becomes hard and crisp; again like a cake and not like a biscuit. Generally I would expect a stale biscuit to have become soft.

...

Generally, I come to the conclusion that Jaffa Cakes have characteristics of cakes, and also characteristics of biscuits or non-cakes. I conclude that they have sufficient characteristics of cakes to qualify as cakes within the meaning of item number 1 in group 1 of the fifth schedule. If it be relevant, I also determine that the Jaffa Cakes are not biscuits."

[venta.livejournal.com]

The phraseology there reminds me of the (alledged) lovely judgement of the US Supreme Court which defined tomatoes as legally vegetables while "acknowledging the botanical reality of their fruithood".

I'm sure there used to be a reputable-looking source on the web for that, but at present all I can find is http://tafkac.org/faq2k/science_35.html.

[zotz]

"In the Nuts (unground), (other than ground nuts) Order, the expression nuts shall have reference to such nuts, other than ground nuts, as would but for this amending Order not qualify as nuts (unground) (other than ground nuts) by reason of their being nuts (unground)"

[valkyriekaren.livejournal.com]

I think Lebkuchen fall under the same biscuit/cake dilemma as Jaffa Cakes - they're a more cakey consistency and go hard when stale, not soft.

[venta.livejournal.com]

I'm happy with that, I just wasn't sure how they related to the tax status of coconut ice!

[secondhand-rick.livejournal.com]

I'd like to see all UK taxation replaced with a single income tax.

Now that would reduce confusion.

[venta.livejournal.com]

Hmm.

I have a very, very slim grasp of economics. Accordingly, it's not immediately obvious to me what the downsides of this would be.

Presumably you mean just the one rate of tax, which would mean pushing the "free" earnings boundary up a good way to avoid Bad Stuff happening.

[secondhand-rick.livejournal.com]

Not necessarily a single rate, no. But a single tax. So, no VAT, no duty on booze or fags, no road tax, no council tax, etc. Just income tax. Of course then people would actually understand what percentage of their income goes to government (at all its various levels), which might reduce confusion just a little too much for government to enjoy.

I'd also like to see everyone of adult age receive benefit, but that's a different story.

[shrydar.livejournal.com]

Yes, I've been wondering why we don't just have benefits-for-all plus flat tax on income for decades. Particularly given that the current system (in both the UK and Australia) often results in ludicrously high marginal rates for low income earners and carers as their benefits cut out.

[venta.livejournal.com]

I wonder how much is spent every year on processing the paperwork and means-assesing people and so on to decide whether or not they're due benefit. Not to mention the money spent on chasing down benefit fraud. I suspect it's (a) not enough to justify just giving everyone benefit[*] but (b) a sufficiently large amount that it would go some way towards paying a universal living allowance.

[*] obviously I don't think this sort of saving is the only reason for benefits-for-all :)

[condign.livejournal.com]

In tax literature, there's actually a progressive argument for a declining marginal rate income tax on all income, combined with a flat "retrogrant" that replaces all government support. (Essentially, everyone gets a grant for bare living allowances.) It's a pretty good idea, and absolutely certain never to be enacted anywhere.

[secondhand-rick.livejournal.com]

I don't know where I got it from, but I seem to recall having heard that in the Republic of Ireland for a while different regions had different schemes running, and this principle - that of a basic living allowance for all - was used. When unification of the differing systems was introduced, it fell by the wayside.

The benefits (heh, see what I did there?) are considerable.

[undyingking.livejournal.com]

I think you have to tax capital gains as well. Otherwise people have all sorts of dodges to turn what ought to be income into a capital gain instead.

(Unless you're implicitly redefining 'income' to include what we currently think of as capital gains. In which case, fair enough, and good luck.)

[secondhand-rick.livejournal.com]

Good point; it would clearly require a review of the term 'income'.

[condign.livejournal.com]

;) The definition of the word "income" is actually one of those things that's deceptively difficult. That and "realization." One reason for favoring a VAT over an income tax: it's certainly simpler to tell when a sale occurs than when income does.

[secondhand-rick.livejournal.com]

Harder to means test sales though.

Part of my desire to see a single income tax would be to see just how high it would have to be to match all the current and varied gouges. 70%? 80%?

[vicarage.livejournal.com]

Imposing taxes distorts that area of the economy, and encourages people to use alternate means. So we need capital gains tax as well as income tax. A a broad spread of tax to covers all the bases.

Replacing 1% stamp duty with 20% VAT would change the housing market to a European model, where most people rent, which would be interesting.

There was a R4 series a couple of months ago about taxation policy which asked retired politicians about simplifying tax/benefits. Often governments want to do it, but the backlash from an irrational electorate is political suicide. This happened for fuel VAT, 10% basic rate, winter fuel payment, and is happening now about child benefit. Its a juggernaut which its almost impossible to redirect.

[undyingking.livejournal.com]

If VAT was chargeable to house purchasers, presumably it would also have to be reclaimable by house vendors? Otherwise it's not VAT, it's just a sales tax.

[vicarage.livejournal.com]

Good point, our VAT is a tax on economic activity, not merely sales, and there isn't one with house purchase, just renovation.

[undyingking.livejournal.com]

Mm -- I'm not sure how widely that distinction's understood, or how attached people are to it, so maybe it could be safely elided out of existence.

As a producer, the way that you reclaim input tax on your raw materials and pay output tax on your products means that you are in a very tangible sense being taxed on the value that you add with your process. But I will freely admit that before I set up in business, I had no idea that was how it worked; and I don't suppose many other people who experience it only as consumers do either.

[undyingking.livejournal.com]

the backlash from an irrational electorate

I don't think it's necessarily irrational. The likelihood is that under any such grand rearrangement there will be gainers and losers. The losers will howl like crazy, and the gainers will keep quiet and not be especially grateful.

[vicarage.livejournal.com]

The example quoted was the 10% tax band, which was viewed to be more popular with the electorate than a raise in personal allowance, as the former made good headlines, and it was thought no-one knew the latter. So maybe not irrational, but certainly ill-informed, and who isn't when it comes to tax.

[undyingking.livejournal.com]

I wonder if it's ever really going to be in the govt's interest to simplify the tax system to the point where ordinary people can readily understand it.

[owdbetts.livejournal.com]

Just to comment more on the VAT on fuel issue, because it's an excellent example of a market distortion.

Currently VAT on domestic fuel (gas and electricity) is set at 5%, but the domestic appliances that consume that fuel have VAT set at 17.5%.

This shifts the balance in terms of making it cheaper to just spend more on fuel rather than to buy more expensive appliances that are more energy efficient. If course, if the more expensive appliance saves *enough* energy, it's still in your interests to buy it, but the VAT differential means it has an extra artificial hurdle in its way in order to be cost-effective.

-roy

Because you're just waiting for someone to say it, and everyone so far has had too much taste

[jiggery-pokery.livejournal.com]

Such a move would certainly provide a Boost to the economy!

("They wouldn't let it lie, would they?" "No, they wouldn't, Chancellor.")

Re: Because you're just waiting for someone to say it, and everyone so far has had too much taste

[venta.livejournal.com]

Actually, I wasn't... because I'd forgotten exactly what was slightly rippled with a flat underside!

But well done anyway :)

Re: Because you're just waiting for someone to say it, and everyone so far has had too much taste

[ulfilias.livejournal.com]

What....I still quote the vic reeves adverts !

http://www.youtube.com/watch?v=t0jomX9U9RQ

[fractalgeek.livejournal.com]

Putting VAT across the board would be seen as a tax on the poor, as a greater proportion of their spending is on "essentials": food, fuel, kids clothes,, etc. Political suicide.

Though I heartily agree that the renovate/build discrepency should be sorted.

[venta.livejournal.com]

Yes... although, as the full text of the report points out, the VAT system isn't actually a good way of helping out those on low incomes (or, at least, there are better ways).

Doesn't mean it wouldn't be political suicide to scrap it, though!

[octalbunny.livejournal.com]

It would reduce complexity for medium and large businesses. Really small businesses (turnover less that 67000 UKP) don't have to charge VAT. They get two options: (act like a bigger business) or (don't do any of the VAT paperwork at all).

With kebabs, making the whole thing SR simplifies things. Otherwise the kebab shop would have to decide how much of the price of a kebab is for the bread, and how much is for the filling, and change the tax accordingly.

Rail fares are ZR; and putting them up by 20% without blaming the rail companies would be a courageous act by the government.

[exspelunca.livejournal.com]

You asked for help, but I'm late on coming into this. When I was reading economics, aeons ago, we studied the theory of VAT in great detail. It was presented as "the perfect tax" added at every stage of production(!). It's really like communism, a wonderful theory, but it goes to hell in a handcart in practice because of all or any of the arguments posited above. Why not have a standard rate of VAT on everything and adjust income tax to benefit those on lower incomes? (For reasons wny not see Vicarage & Fractalgeek.) Way before VAT we had equally irrational purchase tax, levied e.g. on new, but not secondhand, jewellery. Plus ca change.