Welcome to the latest in our continuing series on business taxes and reliefs ahead of the Budget on October 30th.
We’ve already looked at the history of CGT to see how and why it has developed how it has as well as what the future of CGT could look like and the immediate threat it could face in the near future.
In our last blog we investigated the reasons why the number of CGT payers had quadrupled in the past 30 years and how the UK compares to other countries with Capital Gains Tax regimes.
In this blog we look at the development and history of Value Added Tax (VAT)
Value Added Tax (VAT) has been around since arguably the end of the first World War, if not the second.
Currently sitting at 20%, being able to make changes to it was once one of the motivating arguments behind the Brexit campaign but like several others, it’s not much mentioned these days which is a pity because it’s never been a universally liked or even understood tax.
It’s also unusual that with a consequential budget approaching in less than six weeks, there is no mention of it changing regarding the speculation around other taxes and reliefs such as CGT or BADR.
Currently 175 countries around the world operate a form of VAT. In the UK alone in 2023/24, receipts came to £168.9 billion, an increase of £10 billion from the previous year.
So how has VAT developed over the years and could it be altered or changed in the coming months and years?
There are two theories regarding how VAT was invented.
One claims that the original concept came from a German scholar and businessman Dr Wilhelm von Siemens in 1918.
He proposed VAT as an alternative to Germany’s existing and unliked turnover tax, in which goods were taxed multiple times throughout the production process, having a cascade effect and taxing exports too.
This existed in one form or another for another 50 years, adding to the economic woes of Weimar Germany.
An alternative and generally more accepted view is that VAT as we know it was introduced in France in 1954 by Maurice Laure.
Stephen Dale, past president of the international VAT Association explains that France was grappling with a dilapidated economy following the second World War. He said: “France had to ensure a stable level of tax revenue, neutral as regards its impact on business investment and exportations and with as little vulnerability to fraud as possible.”
It was adopted by the government and became the world’s first fully fledged VAT system.
The 1957 Treaty of Rome that set up the European Economic Community (EEC) required the European Commission to propose a common system of taxation on goods and services so it was vital that the new tax wouldn’t create any further boundaries in the region.
On that basis the EEC’s first two VAT directives were adopted in April 1967 laying out a blueprint for how the Community’s VAT system would work. Soon after this, individual member states began to introduce the directives into their national laws.
The UK’s introduction
When the United Kingdom joined the EEC in 1973 it was a precondition of joining to adopt the region’s VAT system.
The government of the day and HM Customs and Excise, the precursor to HMRC, both supported the move. They wanted a simple, easily understood and broad based tax with few exceptions and a low rate, initially 10%, that would replace two models operating in the UK at the time.
These were the Purchase Tax and the Selective Employment Tax on Services.
As well as meeting their EEC obligations, this would also make life simpler for businesses and tax collectors while providing consumers with a more visible tax.
The EEC’s Sixth VAT Directive took place in 1978 which set the rules for a uniform basis of assessment across the Community. The following year the Eighth VAT Directive was adopted enabling cross-border VAT refunds between different EEC countries.
The 13th VAT directive in 1986 provided a refund mechanism for businesses that incurred European VAT but had no establishment in the EEC.
More attempts were made to harmonise the region’s VAT rules which were complicated by so many directives. A proposed single-origin based VAT system was proposed in 1985 but no agreement was reached.
As a consequence member states adopted a so-called “transitional VAT system” that enshrined a limited form of origin-based VAT with the intention that it would be replaced by a definitive system within four years.
By 2006, the Sixth VAT directive had been amended so many times and had accrued so many clauses and sub-clauses that it was almost unreadable, so a further directive was issued that revised the entire text.
In 2021 the EU launched a One-Stop Shop (OSS) for the declaration of VAT due on the movement of goods on a business-to-consumer basis within the trading bloc – plus a single point of declaration for low-value goods coming from non-EU countries.
Currently the European Commission is pushing to finalise the adoption of its VAT in the Digital Age (VIDA) package, consisting of two regulations and a directive.
The first part of VIDA relates to electronic invoicing and digital reporting obligations, the second makes digital platforms liable for the VAT due on supplies, in relation to short-term rental accommodation and passenger transport.
The third expands further the “single place of declaration” OSS model so businesses will only have to file tax information in one member state rather than all 27.
Once VIDA is implemented, this package will impact any UK company doing business within and with the EU.
Chris Horner, Insolvency Director with BusinessRescueExpert, said: “We’ve been covering the inception and history of the various taxes that could be affected by the Chancellor in her Budget statement next month.
“CGT, BADR and VAT all have long and interesting histories and it’s important to study them to understand how embedded and critical they are to the government and country’s revenue network.
“There has been no indication that VAT will change as part of the measures to be announced but unlike income tax and corporation tax, they haven’t been explicitly ruled out either.”
Nobody outside of the Treasury and the cabinet knows for sure what the coming Budget statement will contain but one thing we can accurately assume is that it will be more consequential than any in recent years.
No matter what changes or new charges are announced, the best way to protect your business is to arrange a free consultation with one of our expert advisors.
They will work with you to identify any immediate or medium term changes you can make and help you to implement them before Rachel Reeves stands at the dispatch box.