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

[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%?