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.

[nalsa.livejournal.com]

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

[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.

[secondhand-rick.livejournal.com]

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

Now that would reduce confusion.

[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.

[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.")

[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.

[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.