The reason VAT came in was to facilitate the UK’s entry into what was then called the Common Market. We had to have this new tax if we were to join our European neighbours. So legislation was introduced in the Finance Act 1972 and came into force the following April.
At first VAT was seen more as a bookkeeping and accounting issue rather than something professional tax advisers should be dealing with. It was viewed as something that we would all get used to, give it a couple of years, and from then on it would quietly hum away in the background. How wrong this was!
The HMRC press office has provided some interesting statistics. The introduction of VAT required 8000 staff, 5000 briefcases, 200,000 plastic folders, 2,500,000 manila wallets and 50,000 ring binders. Remember - this was 50 years ago.
In those far-off days VAT visits were relatively frequent and definitely encouraged tax compliance. Every newly-registered VAT business was visited in its first six months of trading to ensure that proper accounting records were in place and that there were no complicated issues such as partial exemption or international trading. A compliant and simple business then had routine visits every three years after that to ensure that credible returns were submitted and that claims for input tax on a new car had not been quietly included. A visit from the VAT man (never the VAT lady) was always to be feared. Today a compliance check is usually carried out remotely and a typical HMRC request is a pdf of the largest six purchase invoices and completion of a questionnaire, all to be returned by email, please. We have certainly come a long way.
In the very early years it was a case of blind leading the blind. Staff from Customs & Excise had very little training although, to be fair, they quickly learned the questions to ask. In the occasional visit to a business where a computer was being used to complete returns the instructions were to leave immediately and alert the CAO in the office - computer accounts officer. This distinguished person had earned his rank by going on a residential computer training course for three weeks. It was said that he went from zero to hero in 15 working days.
As the new tax began to bite a plethora of difficulties presented themselves and inevitably many of these ended up before the tax tribunals. A lot of such cases related to food and drink. Perhaps the most famous one - the Jaffa cake case - was about the distinction between a chocolate-covered biscuit (excepted item) and a chocolate-covered cake (zero rated). One can picture the VAT tribunal officer and staff solemnly regarding and tasting a specimen of each and then recording their findings of fact and the VAT consequences that ensued.
Then there was the more recent case of Glanbia Milk Ltd v HMRC - the flapjack case. The company discovered that HMRC had a policy on flapjacks that could work in its favour so they called their particular product by the name of “flapjack”. The learned judge said that it was not a question of what the name was but rather of what the product itself consisted of. He went on to say that it was a matter of informed impression having regard to multiple factors including:
- ingredients
- taste
- texture
- appearance and presentation
- size
- packaging
- marketing
- manufacturing technique
- shelf life
- consistency when stale
- circumstances of consumption
- name
He decided that the product in question was standard rated.
Of course VAT is not all about food and drink - far from it. The scope of this tax embraces pretty well every form of industry and service. There are four rates (if we regard exemption as a rate) and inevitably the weaknesses of the tax lie in its boundaries. This is the area which tends to be exploited and which HMRC is keen to rebut.
When VAT was introduced there was no proper penalty regime. From 1973-1985 the only penalties in place related to serious cheating of the Revenue. Then we saw an introduction of a new penalty procedure, culminating in the 2023 regime, under a “play fair or else” policy which, strange to say, is highly effective. There are very few businesses that are prepared to run the risk of being named and shamed.
There are many, many VAT anecdotes and the like. Here are a couple, both relating to claims for input tax:
- A jazz musician successfully reclaimed VAT on a wig which he claimed was required in order to uphold his reputation as a performer with long hair, the march of time making his own hair follicles unequal to the task.
- Two plumbers trading as plumbing and heating engineers successfully persuaded the tribunal that the purchase of Rolex watches was, to the extent of 25%, necessary for the purpose of their business.
Of course HMRC needs to apply a robust defence in many of these cases. The last thing it wants is to set a precedent which will open the door to a multitude of similar claims.
So VAT has survived and expanded over its life of 50 years. Brexit hasn’t knocked it. It is relatively easy to administer and difficult to avoid. With digital accounting firmly in place the likelihood is that the scope of this tax could be changed, possibly with one or more higher rates introduced in due course. Love it or hate it VAT is firmly embedded in the UK tax system.
