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

[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.